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Performance audit and sunset review, Arizona Department of Housing

Performance audit and sunset review, Arizona Department of Housing

Debra K. Davenport
Auditor General
Performance Audit and Sunset Review
Arizona Department
of Housing
Performance Audit Division
June • 2010
REPORT NO. 10-05
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Audit Staff
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
Melanie M. Chesney, Director
Shan Hays, Manager and Contact Person
Anne Hunter, Team Leader
Monique Cordova
Winter Morris
Marc Owen
Representative Judy Burges, Chair Senator Thayer Verschoor, Vice Chair
Representative Tom Boone Senator John Huppenthal
Representative Cloves Campbell, Jr. Senator Richard Miranda
Representative Rich Crandall Senator Rebecca Rios
Representative Kyrsten Sinema Senator Bob Burns (ex efficio)
Representative Kirk Adams (ex efficio)
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
June 2, 2010
Members of the Arizona Legislature
The Honorable Janice K. Brewer, Governor
Mr. Michael Trailor, Director
Arizona Department of Housing
Transmitted herewith is a report of the Auditor General, a Performance Audit and Sunset
Review of the Arizona Department of Housing. This report is in response to a November 3,
2009, resolution of the Joint Legislative Audit Committee. The performance audit was
conducted as part of the sunset review process prescribed in Arizona Revised Statutes
§41-2951 et seq. I am also transmitting within this report a copy of the Report Highlights for
this audit to provide a quick summary for your convenience.
As outlined in its response, the Department of Housing agrees with the findings and plans
to implement the report’s one recommendation.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on June 3, 2010.
Sincerely,
Debbie Davenport
Auditor General
Attachment
Low-Income Housing Tax Credit
program—Through this federal program,
developers agree to hold a portion of their
rental units for low-income households,
which earn at or below 60 percent of the
area’s median income. These households
pay an “affordable rent” based on the
area’s median income and the number of
persons and bedrooms in the unit. For
example, 50 percent of the median
income for Maricopa County for one
person is $23,050, and the maximum rent
he/she would pay is $576 for a studio unit.
In exchange, the developer receives a
federal tax credit that can be sold to
investors to raise proceeds to build rental
properties.
Since 2003, the Department has awarded
nearly $82 million in federal tax credits,
helping to develop about 7,000 low-income
housing units. The Department
has distributed these projects throughout
the State with 66 percent located outside
Maricopa and Pima Counties.
The report describes three recent
examples of these projects:
 Matthew Henson Development—A 549-unit
project with 445 units reserved for low-income
households. Replacing an existing
1940s-built, low-income housing project,
Phoenix city officials reported that this
development has helped revitalize the
downtown area surrounding it.
 Page Commons—A 100-unit senior housing
complex located in downtown Gilbert that
addressed the need for affordable housing
for a growing population of seniors. This too
revitalized the downtown Gilbert area,
according to Gilbert officials.
Maddox Estates Townhomes—A 60-unit
project that helped address a serious need
2010
June • Report No. 10 - 05
Arizona Department
of Housing
Our Conclusion
The Arizona Department of
Housing (Department) was
created in 2002 and
administers housing
programs that have
increased affordable
housing opportunities and
improved community
services. The Department
generally does not provide
direct services but instead
acts as a “pass-through”
agency for various services
and programs—many
targeting the State’s rural
areas. We reviewed four of
the Department’s largest
programs: Low-Income
Housing Tax Credit,
Community Development
Block Grant, and two home
purchase assistance
programs. We found that
these programs have
increased affordable
housing opportunities—
especially for low-income
housing—and have
facilitated over 430 projects
during state fiscal years
2003 through 2009 that
have improved community
services in Arizona’s rural
communities. Further, the
Department has a
generally sound system for
overseeing the programs it
administers.
REPORT
HIGHLIGHTS
PERFORMANCE AUDIT
Affordable housing increased and communities
enhanced
for affordable housing in Eloy. The
development accommodates larger families
and provides a pool and recreation area
that other housing in the area does not.
Community Development Block Grant
(CDBG)—This federal community
revitalization program provides grants to
benefit low- and moderate-income people
by alleviating slum conditions and
addressing urgent community needs in
Arizona’s rural counties. For example, in
2005, the Department awarded the City of
Eloy more than $340,000 to connect its
water distribution system to an outlying
area called Toltec. Before the connection,
whenever the Toltec water system would
malfunction, Eloy employees had to
purchase bottled water and deliver it to
Toltec residents who ran out of water. It
also created a fire hazard in Toltec
because it would disrupt the source of
water for fighting fires. The water
connection construction has ensured a
continuous supply of water to Toltec in the
event of a system malfunction.
The report also describes CDBG grant
monies to a food bank serving low-income
Photo 1: Matthew Henson
Development—Phoenix
Source: Courtesy of Matthew Henson Apartments.
Department effectively plans, awards, and monitors
resources
REPORT
HIGHLIGHTS
PERFORMANCE AUDIT
June 2010 • Report No. 10 - 05
page 2
The Department has developed effective systems
for overseeing the housing programs it administers.
For example, the Department maintains a strong
control environment over the low-income housing
tax credit program to ensure compliance with
federal Internal Revenue Service requirements
regarding eligibility and monitoring. The
Department:
 Has developed written operating procedures for staff
and compliance manuals for developers, and
 Provides training for property owners.
The Department also conducts thorough on-site
inspections and takes appropriate action when it
discovers problems. For example, at one
development, department inspectors reviewed a
random sample of 62 of 102 tax credit units,
including reviewing tenant files to ensure eligibility
and physically inspecting the units. The Department
discovered income verification problems in more
than half the sample and problems with about half
of the units’ physical conditions.
The State has a 5-year plan for CDBG money that
addresses the needs of low- to moderate-income
persons and addresses slums and urgent
community needs. Department staff also follow
comprehensive guidelines to review projects and
takes actions if there is not satisfactory progress. In
one instance, the Department issued a Failure to
Progress letter to a town whose water system
improvement project was not proceeding in a timely
manner. If the town had not addressed the
timeliness issues, it would have lost funding and
had to repay the monies it had already received.
The Department also oversees lenders and
nonprofit counseling agencies helping low-income
persons to purchase homes. It does this primarily
by using the Internet to receive application
information from the lenders and reviewing the
information to ensure borrowers fall within the
required income guidelines.
A copy of the full report is available at:
www.azauditor.gov
Contact Person:
Shan Hays (602) 553-0333
persons in Tombstone and a construction-job-training
program for youth in the City of San Luis
that has promoted the graduation of at-risk
students.
Home purchase programs help Arizonans buy
homes—The Homes for Arizonans program
provided a portion of the down payment on a home
to first-time homebuyers in rural Arizona, and
between 2002 and 2009, it provided $30 million in
assistance to 2,500 households.
In July 2009, this program gave way to a program
using federal stimulus money to help individuals
purchase foreclosed homes. Under the Your Way
Home program, the Department offers 22 percent of
the purchase price in the form of a deferred second
mortgage to buyers who are at or below 120
percent of the area’s median income. As of March
2010, 462 homes have been purchased with an
average assistance of about $30,000 per home.
Arizona Department
of Housing
Office of the Auditor General
TABLE OF CONTENTS
page i
continued
1
13
13
22
27
31
31
33
37
40
42
43
Introduction & Background
Finding 1: Department programs increase housing
opportunities and enhance communities
Tax credit program provides affordable housing opportunities across the
State
CDBG projects meet community needs across the State
Home purchase programs facilitate home ownership
Finding 2: Department has generally sound system for
planning, awarding, and monitoring housing program
resources
Effective monitoring system is critical to ensuring effective use of
resources and program compliance
Department meets federal tax credit program set-aside and long-term
compliance monitoring requirements
Department provides appropriate oversight for CDBG program
Department’s various monitoring types provide appropriate oversight for
home purchase assistance programs
Recommendation
Sunset Factors
State of Arizona
TABLE OF CONTENTS
continued
Appendix A: Additional programs and resources
Appendix B: Table 6
Appendix C: Methodology
Agency Response
Tables:
1 Schedule of Revenues, Expenditures, and Changes in Fund Balance
Fiscal Years 2008 through 2010
(Unaudited)
2 Housing and Economic Recovery Act of 2008
Neighborhood Stabilization Funding by Jurisdiction
Fiscal Year 2008
(Unaudited)
3 Home Purchase Assistance Expenditures by County
October 2, 2002 through July 17, 2009 (Homes for Arizonans)
June 25, 2009 through March 12, 2010 (Your Way Home)
4 Monies for Tax Credit Allocations, CDBG, and Home Purchase
Assistance Programs
2007 through 2009
(In Millions)
(Unaudited)
5 2007 Initial Tax Credit Awards Compared to 2007 QAP Set-Aside Goals
(Unaudited)
page ii
a-i
b-i
c-i
8
11
28
32
35
Office of the Auditor General
page iii
TABLE OF CONTENTS
continued
b-i
c-iii
3
16
17
18
24
Tables (Continued):
6 U.S. Department of Housing and Urban Development
Allocations for All Arizona Jurisdictions
Federal Fiscal Year 2009
7 CDBG Projects Reviewed
Fiscal Years 2004 through 2007
Figures:
1 Department of Housing Activities, Programs, and Resources
As of March 31, 2010
2 Locations of Tax Credit Program Developments State-wide
Calendar Years 2003 through 2009
(Unaudited)
3 Locations of Tax Credit Program Developments in Phoenix Metro Area
Calendar Years 2003 through 2009
(Unaudited)
4 Locations of Tax Credit Program Developments in Tucson Metro Area
Calendar Years 2003 through 2009
(Unaudited)
5 Number of CDBG Projects and Dollars Awarded
Fiscal Years 2003 through 2009
(In Thousands of Dollars)
(Unaudited)
State of Arizona
TABLE OF CONTENTS
concluded
Photos:
1 Matthew Henson Development—Phoenix
2 Page Commons Development—Gilbert
3 Maddox Estates Development—Eloy
4 Section of Piping Connecting Water Systems in Eloy
5 Interior of New Tombstone Food Bank
6 Interior of Old Tombstone Food Bank
page iv
19
20
21
25
26
26
The Office of the Auditor General has conducted a performance audit and sunset
review of the Arizona Department of Housing (Department) pursuant to a November
3, 2009, resolution of the Joint Legislative Audit Committee. The audit was conducted
as part of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.)
§41-2951 et seq. In addition to assessing the Department’s operations using the
sunset factors specified in statute, this audit focuses on four of the Department’s
largest programs and examines (1) the accomplishments these programs have
achieved and (2) the effectiveness of the Department’s oversight of these programs.
Department mission and purpose
The Department was established in 2002 to help address an anticipated housing
affordability crisis brought on by a widening gap between income and housing
costs.1 The Department’s mission is to provide housing and community revitalization
to benefit the people of Arizona. According to the Department, as of 2003, over 10
percent of Arizona families were not in affordable housing, defined as housing that
costs no more than 30 percent of the adjusted household income. In 2008,
according to U.S. Census Bureau American Community Survey data, approximately
half of renter-occupied units and approximately 40 percent of homes with mortgages
did not meet the standard for affordability.2
In the past several years, housing issues have become prominent concerns because
of the housing market meltdown and the related damage to the nation’s economy. In
Arizona, rapid population growth helped fuel Arizona’s affordable housing and
foreclosure crisis to nearly the worst of all the states. Nationally, Congress directed
stimulus monies to Arizona and other states, including housing-related monies
through the Housing and Economic Recovery Act of 2008 (HERA) and the American
Recovery and Reinvestment Act of 2009 (ARRA). Some of this stimulus money
passes through the Department.
1 Prior to its establishment, the Department’s functions were performed by the Department of Commerce. In 2001 the
Legislature enacted Laws 2001, Ch. 22, §§12 and 14, which transferred the housing programs within the Department of
Commerce first to the Governor’s Office of Housing Development beginning January 1, 2002, and ultimately to the new
Arizona Department of Housing on October 1, 2002. The same bill that established the Department established the
Arizona Housing Finance Authority (Authority). The Authority was established to issue bonds or certificates or provide
financial assistance for housing purposes and to temporarily acquire title to real property. Although the Authority is staffed
by the Department, it is a separate entity from the Department and is not subject to sunset review. However, some of the
Department’s programs are administered jointly with the Authority.
2 U.S. Census Bureau. Arizona: Selected Housing Characteristics: 2006-2008. Data Set: 2006-2008 American Community
Survey 3-Year Estimates.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
The Department provides monies, technical assistance, and compliance oversight to
local governments, public housing authorities, nonprofit and for-profit housing
developers, tribal entities, social service agencies, and qualifying individuals using a
combination of federal and state monies. The monies are provided for such things
as increasing the supply of affordable rental housing, assisting communities with
area revitalization, and providing home purchase assistance. In addition, monies are
used to provide housing and related services for individuals with special needs.
Department responsibilities and programs
The Department generally does not provide direct services but instead acts as a
“pass-through” agency by administering and overseeing programs and services,
several of which are targeted to the State’s rural areas. These programs provide
federal and state monies to local governments, housing developers, and nonprofit
agencies in four areas, described below and shown in Figure 1 (see page 3). Figure
1 also shows the Department’s various programs in each of the four areas.
Department personnel also provide technical assistance to communities and serve
on a state-wide commission that addresses affordable housing needs. Additionally,
according to the Department, staff have been involved in the Arizona Foreclosure
Prevention Task Force to help coordinate outreach and service efforts for the National
Mortgage Foreclosure Counseling program.
Rental housing development and rental assistance—The Department
administers two programs targeted to increasing the supply of affordable rental
housing or helping low-income, elderly, and special needs renters. Specifically:
 Low-Income Housing Tax Credit program (tax credit program)—This U.S.
Internal Revenue Service program awards federal tax credits to housing
developers.1 In exchange for these credits, developers agree to hold a portion
of their rental units for low-income households and charge affordable rents to
qualified tenants in those units. The Department administers and allocates
Arizona’s portion of the program state-wide. Since 2003, the Department has
awarded nearly $82 million in tax credits and helped develop 6,864 low-income
housing units. In 2009, the program awarded over $9 million in tax
credits to develop low-income housing. The Department also administers the
Tax Credit Assistance Program (TCAP) of the ARRA, which provides gap
finance loans to help housing developers cover additional construction costs
associated with projects in Arizona that have already received an allocation of
credits in 2007, 2008, and 2009.
The Department
administers state and
federal monies for a
variety of programs.
1 Tax credits can be used to reduce federal tax liability for a period of 10 years.
State of Arizona
page 2
 Public Housing Authority—The Public Housing Authority operates two federal
Section 8 programs.1 First, Project-Based Contract Administration provides
oversight and monitoring responsibilities for approximately 110 subsidized
properties, representing over 7,900 housing units throughout Arizona.
Second, the Public Housing Authority administers the U.S. Department of
Housing and Urban Development’s (HUD) Section 8 Housing Choice Voucher
Program in Yavapai County because the County is not served by a local public
1 The U.S. Housing Act of 1937, Section 8, authorizes rental voucher and existing housing programs intended to help low-income
households choose and rent safe, decent, and affordable housing. Regulations are found in 24 C.F.R., Part 982,
and the programs are administered by HUD’s Office of Public and Indian Housing.
Office of the Auditor General
page 3
Housing Development and Assistance
Community
Revitalization
Rental Development and
Assistance
Owner-Occupied Housing Homeless and Special
Needs Housing
Tax Credit Administration
Low Income Housing Tax
Credits
(IRS tax credits)
Section 1602 Tax Credit
Exchange
(2009 federal stimulus
monies)1
Gap Finance Loans
Rental Development Gap
Loans
(Housing Trust Fund,
HOME monies)
Tax Credit Assistance
Program
(2009 federal stimulus
monies)
Public Housing Authority
Project-Based Contract
Administration
(HUD monies)
Section 8 Housing
Choice Voucher Program-
Yavapai County
(HUD monies )
Home Purchase
Assistance
Homes for Arizonans2
(Housing Trust Fund)
Your Way Home
(2008 federal stimulus
monies)
Housing Development
and Rehabilitation
Homeownership Unit
Development
(Housing Trust Fund,
HOME monies)
Owner-Occupied
Rehabilitation
(Housing Trust Fund,
HOME, and other HUD
monies)
Emergency Housing
Eviction Prevention and
Emergency Housing
(Housing Trust Fund)
Homelessness Prevention
and Rapid Re-Housing
(2009 federal stimulus
monies)
Special Needs Housing
Housing Opportunities for
Persons with AIDS
(HUD monies)
Shelter Plus Care
(HUD monies)
Supportive Housing
Program
(HUD monies)
Regional and Special
Grants,
Community
Development Block
Grant
(HUD monies)
Community
Development Block
Grant -Recovery
(2009 federal stimulus
monies)
Figure 1: Department of Housing Activities, Programs, and Resources
As of March 31, 2010
Source: Auditor General staff analysis of department-provided information, including its fiscal year 2003 through 2009
annual reports, the FY2005-2009 State of Arizona Consolidated Plan, the Department’s HERA and ARRA
action plans, and other department-provided information on programs, activities, and resources.
1 Federal stimulus resources refer to resources that became available as a result of the HERA and the ARRA.
2 The Department suspended Homes for Arizonans in July 2009 because of instability with its sole funding source,
the State Housing Trust Fund.
housing authority. The voucher program helps very low-income households
limit housing and utilities expenses to 30 percent of their household’s income.
In 2009, over 8,000 households received over $43 million of Section 8
assistance through the Public Housing Authority programs.
Community revitalization—The Department administers a federal program to
revitalize small towns and communities throughout rural Arizona. This program is
called the Community Development Block Grant (CDBG) program. It provides
federal monies for a wide variety of qualified local housing and community
revitalization projects. Distribution criteria requires that projects meet one of three
national program objectives: benefiting people with low and moderate income,
alleviating slum or blight conditions, or addressing urgent community
development needs.
The CDBG program administered by the Department focuses on rural areas. While
most major Arizona cities and counties receive CDBG monies directly from HUD,
the Department contracts with four regional councils of government to help rural
communities prioritize and coordinate local CDBG developments. In fiscal year
2009, according to the Department’s Annual Report, the Department administered
over $11 million in CDBG funding to community projects and individual
homeowners throughout the State. Eighty-five percent of these monies were
distributed regionally by the councils of government, while the remaining 15
percent were allocated for state-wide distribution through competitive bids.
Home ownership assistance—The Department administers federal and state
monies for home purchase assistance, home ownership education and
counseling, and rehabilitation of owner-occupied homes. Specifically the home
purchase assistance programs are:
 Your Way Home—Using federal stimulus monies, the Department
implemented a state-wide home purchase program called Your Way Home.
The program helps qualified homebuyers purchase eligible foreclosed
homes. Participants’ gross income must be no greater than 120 percent of the
area’s median income for the county where the foreclosed property is located.
As of March 12, 2010, the program had facilitated the purchase of 462 homes
with nearly $13.7 million expended.
 Homes for Arizonans—From June 1998 until July 2009, the Department
offered this first-time homebuyer program for Arizona’s rural areas. The
program was supported jointly by the State Housing Trust Fund and the
Arizona Housing Finance Authority (see page 1 for more information on the
Housing Finance Authority and page 9 for information on the State Housing
Trust Fund). The Department distributed $2.7 million to homebuyers through
Homes for Arizonans between January and mid-July of 2009, assisting 226
households. According to the Department, the program was suspended in
The Department’s
community revitalization
program targets rural areas.
State of Arizona
page 4
July 2009 to make way for the Your Way Home program and because of the
uncertainty of continued funding for the program.
Special needs—Finally, the Department administers federal and state monies to
provide housing services to targeted populations, such as people with HIV/AIDS,
or people facing homelessness or needing emergency assistance. Specifically:
 Housing Opportunities for Persons with AIDS (HOPWA)—This program
provides monies to nonprofit organizations to assist in providing housing or
related services to individuals with HlV/AIDS. Money is passed through to local
governments or nonprofit organizations that provide direct assistance to
eligible participants. The Department provides administrative oversight for
HOPWA programs and reported that in fiscal year 2009, the HUD program
monies for HOPWA totaled $185,270.
 Homeless programs—These programs competitively award monies to local
governments or nonprofit agencies that offer programs to address
homelessness problems that may go beyond basic housing concerns. This
category addresses needs of populations experiencing serious mental illness,
domestic violence, substance abuse, and other issues.
The Department administers three such homelessness programs. First, under
a federally funded rural Continuum of Care process, the Department issues
grants for Shelter Plus Care, which provides rental assistance for homeless
persons with disabilities, such as serious mental illness, and Supportive
Housing Program monies, which are used for housing and services that assist
people in the transition from homelessness, as well as services that enable
homeless persons to live as independently as possible. The services include
such things as child-care, employment assistance, health services, and case
management. The Shelter Plus Care program provided $7 million of
assistance in fiscal year 2009 and the Supportive Housing Program provided
$2.3 million of assistance in fiscal year 2009. Second, the Department
administers Eviction Prevention/Emergency Housing grants. Under this
program, which, according to the Department, will be discontinued in June
2010, State Housing Trust Fund monies are available for rental security
deposits, utility payments, and mortgage payment assistance to deter
homelessness. In fiscal year 2009, more than $3.7 million was committed to
the Eviction Prevention/Emergency Housing program. Third, the Department
administers the Homeless Prevention/Rapid Re-Housing program (HPRP),
which uses federal stimulus monies to assist low-income families to retain or
secure housing by providing services such as rental and housing relocation
assistance and utility payment assistance. The Department was awarded
more than $7 million in federal stimulus monies for this program.
The Department
administers several
programs aimed at
assisting the homeless.
Office of the Auditor General
page 5
Organization and staffing
The Department of Housing has a governor-appointed director and two major
divisions: Programs and Operations. The Department had a total of 56 full-time
equivalent positions (FTEs) for fiscal year 2010, including 2 in the Director’s office,
and 0 vacancies as of May 5, 2010. In addition, the Department has established 3
new positions for a new federal program that will start in the summer of 2010.1
According to the Department, only 11 positions are state-appropriated with State
Housing Trust Fund monies. The remaining positions are supported with monies
from federal resources that are allowed to be set aside for program administration,
program fees such as tax credit program application fees, and other non-State
General Fund resources.
The Programs Division (27 FTE) oversees programs the Department administers and
is organized into four areas. Specifically:
 Community Development and Revitalization oversees the Department’s
administration of the CDBG program, and accepts and reviews home
ownership applications for State Housing Trust Fund and federal HOME
Investment Partnerships Program (HOME) monies.2 The unit is also responsible
for overseeing the Department’s home purchase assistance programs such as
Homes for Arizonans and Your Way Home.
 Rental Programs staff administer the tax credit program and review applications
for gap finance loans for projects that have already received tax credits, but
require additional funding (see page 10 for more information on the federal
stimulus monies).
 Risk Assessment officers provide underwriting and risk analysis assessments
on proposed rental development program projects. The risk assessment staff
also review some types of housing bonds issued by the Arizona Housing
Finance Authority for affordable and special needs housing (see page 1 for
information about the Arizona Housing Finance Authority).
 Special Needs administers the Department’s programs that assist people with
HIV/AIDS, serious mental illness, or chronic substance abuse, and persons and
families who are homeless or victims of domestic violence.
The majority of
department staff are
supported with federal
monies.
1 In February 2010, the Obama Administration announced its intent to award more that $1.5 billion to the five states hardest
hit by the foreclosure crisis. The Department anticipates receiving $125.1 million of these monies, which are authorized
by the federal Emergency Economic Stabilization Act of 2008.
2 Federal HOME monies are monies allocated to the Department for both home ownership and rental housing projects.The
Rental Programs area reviews applications for rental housing projects and administers rental project monies.
State of Arizona
page 6
The Operations Division (26 FTE) is responsible for finance and accounting, human
resources, information technology, and legal services, and houses the Department’s
Public Housing Authority functions. The Division also has specific program
responsibilities in the following area:
 Housing compliance officers monitor the long-term compliance of rental
development program properties that benefited from the tax credit program as
well as federal HOME monies. See Finding 2, pages 31 through 42, for more
information on compliance activities.
The Department also provides staff support to the Arizona Housing Commission, an
advisory body to the Department, and the Arizona Housing Finance Authority, a
separate entity with its own housing assistance programs. Specifically:
 The Arizona Housing Commission comprises 24 members from private
industry; community-based nonprofit housing organizations; and state, local,
and tribal governments, with staff support provided by the Department. The
Commission, established by Laws 2001, Ch. 22, §14, is an advisory body to the
Department. Some of its statutory duties are to recommend housing strategic
planning and policy; coordinate public and private housing finance programs;
provide recommendations for better private and public partnerships and
initiatives to develop housing; review state housing programs; encourage the
development of special needs housing; and advise the Governor, Legislature,
and state and local government agencies on public and private actions that
affect the cost or supply of housing.
 The Arizona Housing Finance Authority (1 FTE) consists of seven governor-appointed
board members. One full-time department employee provides staff
support. The Department and the Authority also have an interagency service
agreement in which the Department provides administrative, operating, and
programmatic support to the Authority. The Authority, created in 2002, can issue
Multi-Family Revenue Bonds for rental projects, low-interest Single-Family
Mortgage Revenue Bonds for first-time homebuyers’ primary financing, and
Mortgage Credit Certificates to help provide additional income for first-time
homebuyers through tax credits.
Funding sources and financial operations
The Department receives monies from a variety of federal and state sources, but
none from the State General Fund. In fiscal year 2009, its revenues totaled more than
$110 million, as shown in Table 1 (see page 8).1
1 This does not include the value of the Low-Income Housing Tax Credits received from the U.S. Internal Revenue Service.
According to the Department’s fiscal year 2009 annual report, it received and allocated more than $118.5 million worth
of tax credits. The Department reports tax credit figures at the projected 10-year value of the credits at current market
prices.
Office of the Auditor General
page 7
The Department’s
activities are funded with
a combination of state
and federal monies.
State of Arizona
page 8
2008 2009 2010
(Actual) (Actual) (Estimate)
Revenues:
Intergovernmental $ 68,040,133 $ 77,445,907 $ 123,241,500
Unclaimed property proceeds 2 33,684,313 28,554,061 10,500,000
Charges for services 3,461,899 1,603,094 2,843,400
Interest and other investment income 2,703,240 932,073 707,000
Loan and other income 1,201,437 659,039 300,000
Other 34,400
Total revenues 109,125,422 109,194,174 137,591,900
Expenditures and transfers:
Personal services and related benefits 4,565,920 4,269,446 4,302,800
Professional and outside services 537,702 700,026 443,900
Travel 105,310 99,911 114,500
Food 24,138 84,647 90,000
Aid to organizations and individuals 87,302,569 97,180,758 135,502,700
Other operating 923,380 829,907 846,200
Equipment 75,629 25,965 107,000
Total expenditures 93,534,648 103,190,660 141,407,100
Transfers to the Housing Finance Authority 3 4,000,000 1,500,000
Transfers to the State General Fund 4 13,437,000 32,948,600 13,565,400
Transfers to other state agencies 5 2,032,262 3,775,738 2,025,000
Total expenditures and transfers 113,003,910 141,414,998 156,997,500
Net change in fund balance (3,878,488) ( 32,220,824) ( 19,405,600)
Fund balance, beginning of year 73,734,727 69,856,239 37,635,415
Fund balance, end of year 6 $ 69,856,239 $ 37,635,415 $ 18,229,815
Table 1: Schedule of Revenues, Expenditures, and Changes in Fund Balance 1
Fiscal Years 2008 through 2010
(Unaudited)
1 Excludes the Arizona Housing Finance Authority because it is a separate entity and is not subject to sunset review.
2 In accordance with A.R.S. §44-313, the Department’s State Housing Trust Fund received 35 percent of the proceeds from the
sale or conversion of unclaimed properties in the State during fiscal years 2008 and 2009. Laws 2009, 4th S.S., Ch. 3, §12,
changed the allocation to $10.5 million beginning in fiscal year 2010.
3 The Department transferred $4 million to the Arizona Housing Finance Authority during fiscal years 2008 and 2009 as part of its
intergovernmental agreement with the Authority. During fiscal year 2009, the Department transferred back from the Authority
$2.5 million; therefore, the net transfers to the Authority for fiscal year 2009 were $1.5 million.
4 Consists of transfers to the State General Fund in accordance with Laws 2008, Ch. 53, §§2 and 23, and Ch. 285, §§24 and 46;
Laws 2009, Ch. 11, §110, and Ch. 12, §144, 1st S.S., Ch. 1, §§4 and 5, and 5th S.S., Ch. 1, §2; and Laws 2010, 7th S.S., Ch.
1, §113.
5 Includes $2 million each year transferred to the Department of Health Services for the development of housing for the seriously
mental ill. In addition, fiscal year 2009 includes $1 million transferred to the Department of Economic Security to provide
housingservices to homeless youth and $750,000 to the Department of Veterans’ Services to create and expand the availability
of safe,decent, and affordable housing for veterans experiencing homelessness.
Source: Auditor General staff analysis of the Arizona Financial Information System (AFIS) Accounting Event Transaction File for
fiscal years 2008 and 2009; the AFIS Management Information System Status of General Ledger-Trial Balance screen for
fiscal years 2008 and 2009; and department-provided estimates for fiscal year 2010 as of April 9, 2010.
1 This change was part of the Revenue Budget Reconciliation enacted in Laws 2009, 4th S.S., Ch. 3, §12, which the
Governor approved on November 23, 2009, and effective retroactively to June 30, 2009. A.R.S. §44-313 as amended
does not designate any of these monies to rural areas or areas with state prison facilities.
2 Gap financing loans are used to fill the gap left by traditional financing methods.
3 These transfers were required by Laws 2008, Ch. 53 and 285; Laws 2009, Ch. 12; Laws 2009, 1st S.S., Ch. 1 and 5th
S.S., Ch. 1; and Laws 2010, 7th S.S., Ch. 1. In addition, Laws 2010, 7th S.S., Ch. 1, requires $4.5 million to be transferred
from the State Housing Trust Fund to the State General Fund in fiscal year 2011.
Office of the Auditor General
page 9
Key categories of funding include:
 Federal agency programs—In fiscal year 2009, more than $77 million of the
total was received from other government agencies, including HUD. For several
HUD-funded programs, the amount of funds made available through the
Department is determined using a formula-based system (see Table 6 in
Appendix B, pg. b-i).
 State Housing Trust Fund—This fund administered by the Department receives
proceeds from the State’s unclaimed property and investment earnings. The
Department received more than $28 million in fiscal year 2009 in accordance
with A.R.S. §44-313, which required the Department of Revenue to deposit 55
percent of unclaimed property proceeds into the State Housing Trust Fund,
including 20 percent for use in rural areas and areas with state prison facilities.
However, the Legislature amended A.R.S. §44-313 beginning in fiscal year
2010, changing the State Housing Trust Fund allocation to a fixed amount of
$10.5 million annually.1
State Housing Trust Fund monies are used to support all the Department’s
programs. For example, they have been used for rental development gap
financing loans and for emergency assistance to individuals.2 In fiscal years
2008, 2009, and 2010, the Legislature transferred $10.2 million, $25.8 million,
and $7 million, respectively, from the State Housing Trust Fund to the State
General Fund.3 In addition, in fiscal year 2008, the Legislature transferred the
remaining balance of $364,000 in the Housing Development Fund, which had
been established to implement a program in areas with state prison facilities,
to the State General Fund.
 Housing Program Fund—This fund, also administered by the Department, is
authorized to receive monies from a variety of fees, investment earnings, and
other sources. The fees include fees for reviewing applications for the tax credit
program and monitoring long-term compliance with the program; fees for
reviewing industrial development authorities’ applications to issue bonds to
finance certain types of facilities, including rental projects and some medical
facilities; and fees or cost reimbursements for any of its programs or duties. In
fiscal year 2010, the Department estimated it would collect $5.3 million in fees.
Housing Program Fund monies can be used to pay the costs of administering
State of Arizona
page 10
any department program. In fiscal years 2008, 2009, and 2010, the Legislature
transferred $2.8 million, $3.5 million, and $6.6 million, respectively, from the
Housing Program Fund to the State General Fund.1
 Federal stimulus monies—Starting in 2008, the Department has received
additional monies through federal stimulus programs that HUD and the U.S.
Department of the Treasury fund. First, the HERA, which created the federal
Neighborhood Stabilization Program, provided Arizona with a total of $121.1
million, of which $38 million was provided to the Department for use in housing
programs state-wide. The remaining monies were provided directly to cities
within Maricopa and Pima Counties (see Table 2, page 11). These monies were
targeted to areas with high foreclosure rates and were limited to five eligible uses
(see textbox). The Department is using $26 million to fund the Your Way Home
program, which assists individuals in purchasing foreclosed homes, $9.6 million
for redeveloping foreclosed, vacant or blighted multi-family properties, and $2.7
million for planning and administration. Second, the 2009 ARRA authorized
Arizona jurisdictions a total of $153.3 million of additional monies for HUD
programs, including the CDBG, homelessness prevention programs, and gap
finance loans. The ARRA also authorized states to exchange a portion of their
credit program ceiling for cash grants to make awards for building or
rehabilitating low-income housing. The Department was awarded $42.5 million
for the HUD programs and $37.6 million from the U.S. Treasury for the tax credit
exchange program.2 Finally, according to the Department, it will receive $125.1
million from the Emergency Economic Stabilization Act of 2008 (EESA)
beginning in the summer of 2010.
1 These transfers were required by Laws 2008, Ch. 53 and 285; Laws 2009, Ch. 11; Laws 2009, 1st S.S., Ch. 1 and 5th
S.S., Ch. 1; and Laws 2010, 7th S.S., Ch. 1. In addition, Laws 2010, 7th S.S., Ch. 1, requires $1.4 million to be transferred
from the Housing Program Fund to the State General Fund in fiscal year 2011.
2 The ARRA also authorized additional monies for the federal Neighborhood Stabilization Program for allocation on a
competitive basis, but the Department did not apply for this funding. According to the Department, these monies were
intended for local jurisdictions.
Eligible Uses for 2008 HERA
 Establish financing mechanisms for the purchase and redevelopment of
foreclosed homes and residential properties
 Purchase and rehabilitate abandoned or foreclosed homes and residential
properties so that they may be sold, rented, or redeveloped
 Establish land banks for foreclosed homes
 Demolish blighted structures
 Redevelop demolished or vacant properties
Source: Auditor General staff analysis of HUD’s notice of allocation for the HERA. Federal Register. (2008, October).
Notice of allocations, application procedures, regulatory waivers granted to and alternative requirements for
emergency assistance for redevelopment of abandoned and foreclosed homes grantees under the Housing
and Economic Recovery Act, 2008, 73 (194), 58330-58349.
Office of the Auditor General
page 11
In response to fiscal year 2009 fund balance transfers, according to department
officials, they reduced spending by reducing the Department’s workforce by 18
percent, or 13 positions, and eliminating a division, the Center for Housing
Affordability and Livable Communities (Center). The Center was established to
provide access to research and the best practices in housing innovation, training,
and guidance at the local level and worked to improve Arizona’s participation of
nonprofit or community-based organizations in community development and
affordable housing.
Audit scope and objectives
This performance audit and sunset review focused on four of the Department’s
programs: the tax credit program, the CDBG program, and two home purchase
assistance programs—Your Way Home and Homes for Arizonans. The audit focused
on these programs because they serve a large number of citizens and receive a
significant amount of federal and state resources. These programs also represent the
variety and diversity of programs administered by the Department. With regard to
these four programs, the audit focused on two main objectives: (1) analyzing these
Jurisdiction Amount Funded
State of Arizona $ 38,370,206
Phoenix 39,478,06
Maricopa County 9,974,267
Mesa 9,659,665
Tucson 7,286,911
Glendale 6,184,112
Pima County 3,086,867
Avondale 2,466,039
Chandler 2,415,100
Surprise 2,197,786
Total Arizona $121,119,049
Source: Auditor General staff analysis of HUD’s notice of allocations for the
HERA. Federal Register. (2008, October 6). Notice of allocations,
application procedures, regulatory waivers granted to and alternative
requirements for emergency essistance for redevelopment of abandoned
and foreclosed homes grantees under the Housing and Economic
Recovery Act, 2008, 73 (194), 58330-58349.
Table 2: Housing and Economic Recovery Act of 2008
Neighborhood Stabilization Funding by Jurisdiction
Fiscal Year 2008
(Unaudited)
programs’ accomplishments in providing housing and community revitalization and
(2) analyzing the effectiveness of the Department’s oversight of these programs. In
addition, the report includes responses to the 12 sunset factors specified in A.R.S.
§41-2954.
The audit was conducted in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for our findings
and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
The Auditor General and staff express appreciation to the Department’s director and
staff for their cooperation and assistance throughout the audit.
State of Arizona
page 12
Department programs increase housing
opportunities and enhance communities
The Arizona Department of Housing’s (Department) programs have facilitated
increased affordable housing opportunities and improved community services
across the State. Auditors found evidence of these accomplishments across all four
of the programs reviewed in detail. More specifically:
 The Low-Income Housing Tax Credit program (tax credit program) has provided
thousands of additional housing units targeted at low-income populations.
 The Community Development Block Grant (CDBG) program administered by
the Department has addressed and met community needs in rural areas.
 The Department’s home purchase assistance programs—Homes for Arizonans
and Your Way Home—have aided more than 2,700 Arizona households in
achieving home ownership.
Auditors focused on these four programs because they serve a large number of
citizens and receive a significant amount of federal and state resources, and they
represent the variety and diversity of programs administered by the Department. See
Finding 2 (pages 31 through 42) for an assessment of the Department’s award
process and monitoring practices for these programs.
Tax credit program provides affordable housing
opportunities across the State
The tax credit program has created additional affordable housing opportunities for
Arizonans. The program uses federal tax credits to help finance low-income housing
for families, the elderly, and special needs populations (see textbox, page 14).
Since its creation in 1986, the tax credit program has facilitated the construction of
362 properties that provided more than 23,000 affordable housing units in Arizona.
Office of the Auditor General
page 13
FINDING 1
Auditors’ case studies focused on three tax credit program properties in different
geographic areas and found that the developments addressed both community and
individual needs.
Finding affordable housing opportunities is a challenge facing many Arizonans.
According to its 2006 through 2008 American Community Survey data, the U.S.
Census Bureau estimates that 328,370 of the renter-occupied units in Arizona, or
approximately half, were not considered affordable based on the income level of their
occupants.1 According to the U.S. Department of Housing and Urban Development
(HUD), affordable housing is defined as housing that costs less than 30 percent of
the household’s annual income.
Tax credit program uses federal tax credits to build affordable
housing—The tax credit program is a federal program administered at the state
level by the Department and is designed to make monies available to develop
rental housing for low-income households, which can include the elderly, veterans,
and other special needs populations.2 The annual amount of tax credits available
for the Department to distribute is determined by a population-driven formula
found in the federal Internal Revenue Code. Project developers that receive a tax
credit award from the Department sell the credits to private investors and use the
proceeds, which can be supplemented by other monies such as State Housing
Trust Fund loans, to build rental properties (see Introduction and Background,
1 U.S. Census Bureau. Arizona: Selected Housing Characteristics: 2006-2008. Data Set: 2006-2008 American Community
Survey 3-Year Estimates.
2 For the tax credit program, low-income households are those whose income is 60 percent or less of the area median
income.
State of Arizona
page 14
Low-Income Housing Tax Credit program
 The program was established in 1986 and provides the single largest
subsidy for low-income rental housing through the Federal Internal
Revenue Code.
 Under the program, states are authorized to issue federal tax credits for
the acquisition, rehabilitation, or new construction of affordable rental
housing.
 The program provides incentives to develop and invest in low-income
rental housing because developers can sell the credits to private
investors and use the proceeds to help cover acquisition, construction,
and other development costs, or developers can use the tax credits to
offset taxes on other income.
 Program developments are required to charge affordable rent for
qualified low-income tenants, which may include families, senior citizens,
and special needs populations.
Source: Auditor General staff analysis of Internal Revenue Code (26 U.S.C. §42); Schwartz, A.F.
(Ed.).(2006). Housing policy in the United States: An introduction. New York: Routledge; and the
Department’s 2009 Qualified Allocation Plan.
pages 1 through 12, for information on the State Housing Trust Fund). In return,
they must reserve some of their units as low-income units for at least 30 years and
charge affordable rent to qualified tenants in those units.1 “Affordable” means that
the rent is no more than 30 percent of the income limitation for the unit, which is
based on the median income for the area. For example, as of March 2009, 50
percent of the area median income in Maricopa County for a one-person
household is $23,050, meaning the rent charged to this person could not exceed
$576 for a studio unit.2 See Finding 2 (pages 31 through 42) for information on how
the Department monitors the tax credit program.
The Department relies on the State’s Qualified Allocation Plan to determine how it
allocates tax credits. The plan establishes goals and guidance for the tax credit
program in Arizona. The Internal Revenue Code requires allocating agencies like
the Department to use such a plan in allocating the federal tax credits, and the
Department develops a new plan annually. In an effort to assess and address the
affordable housing needs across the State, the Department seeks public input on
the plan from nonprofit groups, advocacy groups, cities, developers, and others
(see Sunset Factor 2, pages 43 through 45) and incorporates the feedback in
developing the plan. The 2009 plan sets out 19 goals for the tax credit program,
such as maximizing the number of affordable units added and administering the
program in a way that encourages timely project completion and occupancy.
The Department distributes tax credits throughout Arizona and ensures that all
available tax credits are used. One of the Department’s goals is to provide an
equitable distribution of tax credits across the State. As seen in Figures 2, 3, and
4 (see pages 16, 17, and 18 respectively), the Department has awarded tax credits
to projects located in 14 of Arizona’s 15 counties, with the majority of tax credit
program projects (66 percent) located outside of Maricopa and Pima Counties.3 In
addition, the Department has set an annual goal of allocating all of the available
federal tax credits. If tax credits assigned in a particular year are not allocated to a
tax credit program project within 2 years, the credits are forfeited by the State and
go into a national pool for reassignment to eligible states. Tax documents
submitted to the U.S. Internal Revenue Service (IRS) by the Department indicate
that the Department has allocated all of its available tax credits within the 2-year
time frame and has never returned credits.4
The Department
establishes state goals
for the tax credit
program.
1 Under the Internal Revenue Code 26 U.S.C. §42(g), the developer must either set aside 20 percent of the project’s units
for people below 50 percent of the area’s median income or set aside 40 percent of the units for people below 60 percent
of the area’s median income. In addition to the rent restriction, the units must be occupied by individuals whose income
is below the 50 or 60 percent limit.
2 Area median income varies according to the number of persons in the unit, and allowable rents charged vary according
to the number of bedrooms in the unit.
3 According to department data, Greenlee County has no tax credit program projects.
4 The Department had a carryover of $739,352 in credits in 2009 that can be awarded in 2010.
Office of the Auditor General
page 15
State of Arizona
page 16
Figure 2: Locations of Tax Credit Program Developments State-wide
Calendar Years 2003 through 2009
(Unaudited)
Source: Auditor General staff analysis of department data on tax credit program projects.
Mohave Coconino
Yavapai
Maricopa
Yuma
La Paz
Navajo
Apache
Gila
Graham
Greenlee
Pinal
Pima
Cochise
Santa Cruz
Mohave Coconino
Yavapai
Maricopa
Yuma
La Paz
Navajo
Apache
Gila
Graham
Greenlee
Pinal
Pima
Cochise
Santa Cruz
Tax credit program has increased affordable rental housing—
According to housing literature, the federal tax credit program is the largest and is
widely regarded as the most successful program for building affordable housing
opportunities in the nation.1 Since the federal tax credit program’s creation in 1986,
the State has awarded approximately $164 million in federal tax credits to facilitate
the construction of 362 tax credit program projects in Arizona, providing for more
than 23,000 affordable housing units.2 It is by far the Department’s largest
affordable housing program; by comparison, the Section 8 project-based program
provided fewer than 8,000 units of affordable housing state-wide as of June 2009
(see Introduction and Background, pages 1 through 12, for information on the
Section 8 project-based program). Since its inception as a stand-alone agency, the
Department has awarded tax credits to 117 projects, including 10 that were
awarded tax credits in 2009. The anticipated average total cost for the 2009
projects is $11.5 million, with an average of nearly $950,000 in credits allocated to
each project.
Office of the Auditor General
page 17
Figure 3: Locations of Tax Credit Program Developments in Phoenix Metro Area
Calendar Years 2003 through 2009
(Unaudited)
Bell Rd
Shea Blvd
Camelback Rd
Source: Auditor General staff analysis of department data on tax credit program projects.
1 Schwartz, A.F. (Ed.). (2006). Housing policy in the United States: An introduction. New York: Routledge; Joint Center for
Housing Studies of Harvard University (2009). The disruption of the low income housing tax credit program: Causes,
consequences, responses, and proposed correctives. Retrieved May 3, 2010, from
http://www.jchs.harvard.edu/publications/governmentprograms/disruption_of_the_lihtc_program_2009.pdf
2 Until the Department of Housing was created as a stand-alone agency in October 2002, the Department of Commerce
awarded the tax credits.
Tax credit program properties address community needs—Low
vacancy rates indicate that tax credit program properties are meeting the demand
for affordable housing. The vacancy rate for tax credit properties located outside
of Maricopa and Pima Counties was 6.9 percent as of December 31, 2008.1,2 By
comparison, the U.S. Census Bureau estimated Arizona’s overall rental vacancy
rate from 2006 through 2008 was 9.7 percent. HUD reported that tax credit
program properties had considerably lower vacancy rates than the nation’s overall
rental market in 2005 through 2009 based on a survey of eight investors’
portfolios.3
State of Arizona
page 18
Grant Rd
Broadway Blvd
Valencia Rd
Kolb Rd
Grant Rd
Broadway Blvd
Kolb Rd
Valencia Rd
Figure 4: Locations of Tax Credit Program Developments in Tucson Metro Area
Calendar Years 2003 through 2009
(Unaudited)
Source: Auditor General staff analysis of department data on tax credit program projects.
1 The 2008 vacancy data was the most recent available as of January 2010. There were 206 vacancies in 56 reporting rural
properties out of a total of 3,007 units. The vacancy rate for urban tax credit properties was not readily available.
2 According to the Department, tax credit property owners and management companies are primarily responsible for
marketing and advertising their developments.
3 Collinson, R., & Winter, B. (2010). U.S. rental housing characteristics: Supply, vacancy, and affordability [HUD PD&R
Working paper 10-01]. Washington, D.C: U.S. Department of Housing and Urban Development.
Case studies of three projects that received tax credit allocations from 2003 through
2006 illustrate the results of these projects in their communities. Specifically:
 Downtown Phoenix development built to revitalize neighborhood and tackle
blight in the community—Matthew Henson is a large housing development
located in downtown Phoenix, near Grant Street and 7th Avenue, designed to
revitalize and provide additional affordable housing opportunities in the
downtown community (see photo). The development replaced a severely
distressed low-income housing project that was originally constructed in the
1940s. As a mixed-income development, Matthew Henson contains 549
housing units, 445 of which are reserved for low-income households. The
development was financed in four phases and received tax credit awards each
year from 2003 to 2006, totaling nearly $4.3 million in tax credits. The
development’s main funding source was a $35 million HUD HOPE VI grant that
the City of Phoenix received in 2001.1 In addition to providing housing, the
development provides HOPE-VI-sponsored assistance, such as job training,
education, transportation, and daycare services for its residents.
The construction of Matthew Henson
has had a positive impact on the
downtown community. City of Phoenix
officials indicated that one of the major
impacts is that the neighborhood
surrounding Matthew Henson seems
more engaged and interested in
ensuring that the area is clean, safe,
and properly maintained. A project
stakeholder similarly observed that the
streets around Matthew Henson are
cleaner, the whole feel and look of the
neighborhood is improved, and
surrounding neighborhoods were
starting to make improvements as
well. Further, city housing officials
indicated that crime had decreased in
the area and that this drop was
attributed in part to the revitalization brought on by Matthew Henson’s
construction. Finally, the property also helps its low-income tenants pay
affordable rent. Auditors spoke with a resident who said that living in Matthew
Henson has provided her with the independence she desired and the cost-savings
she needed to address other financial obligations. According to
Matthew Henson property management, the tenant paid $875 for a unit that
would have cost $925 at the market rate and until recently would have cost
$1,025.2
1 HOPE VI is a federal program developed to eliminate severely distressed public housing.
2 According to property management, the market rate for this unit was gradually reduced between approximately February
2009 and February 2010.
Office of the Auditor General
page 19
Photo 1: Matthew Henson Development—Phoenix
Source: Courtesy of Matthew Henson Apartments.
 Gilbert project addresses need for senior housing—Page Commons is a 100-
unit independent senior housing apartment complex located in downtown
Gilbert, near Gilbert and Elliott Roads (see photo). The property was awarded
more than $660,000 in tax credits in 2003. According to the developer’s
application, Page Commons represents Gilbert’s first affordable living
community dedicated exclusively to seniors. A third-party market study included
as part of Page Commons’ application for tax credits indicated the need for such
a development. In addition, the application cited 2000 census figures, reporting
that 45 percent of senior renters surrounding the development in Gilbert paid 35
percent or more of their income on rent, compared to the standard HUD
established that households should not devote more than 30 percent of their
income on housing costs. Further, the study found that even if all the affordable
units within Page Commons were occupied, there would be demand for an
additional 1,176 senior units in the market area. According to the property
manager, an affordable development dedicated solely to seniors was very
important for Gilbert because of the area’s growing senior population.
Besides helping to address a growing housing need, Page Commons has
provided revitalization within the Town of Gilbert. The property manager and a
Gilbert official indicated that Page Commons’ construction leveraged efforts to
build a nearby community center, which have concurrently helped to revitalize
the surrounding area, remove blight,
and serve the senior population.
Further, Page Commons’ focus on
serving seniors has significantly
contributed to Gilbert’s multi-generational
emphasis for that part of
town. A Page Commons resident
indicated that living in an affordable
development allows her more financial
independence than she would
otherwise have because of the
reduced rent that she pays. The
resident also indicated that the
surrounding area was improved and
looked nicer because of the Page
Commons’ construction.
State of Arizona
page 20
Source: Arizona Office of the Auditor General.
Photo 2: Page Commons Development—Gilbert
 Rural tax credit development increases affordable housing—Maddox Estates
Townhomes is a 60-unit affordable housing development located in Eloy, a
small rural city in southern Arizona near Interstate 10 and Alsdorf Road (see
photo). Maddox Estates was awarded nearly $675,000 in tax credits in 2003
and is designed to serve families in rural Arizona. According to the application
the developer submitted, prior to the construction of Maddox Estates, no new
multi-family development had been built in Eloy since 1993 and a market
study indicated a strong demand for family housing.
The project has helped address a serious need for affordable housing in Eloy.
A market demand study conducted in conjunction with the planning of the
development indicated that even if every unit in Maddox Estates were to be
occupied, there would still be demand for an additional 322 units in the
market area. The study also indicated that three other tax credit properties in
the area had only one vacant unit between them. Further, a resident of
Maddox Estates told auditors that it was difficult to find other decent
affordable housing in Eloy. In addition, prior to Maddox Estates’ construction,
more than 40 HUD Section 8 vouchers in Eloy went unused because there
was not enough available housing for the vouchers’ recipients.1 According to
an Eloy Public Housing Authority representative, as of February 2010, all 143
of the Section 8 vouchers available were being used, including 19 within the
Maddox Estates development.
Maddox Estates has provided additional affordable housing opportunities
and a nicer living environment for low-income tenants in the area, and a
community block watch has been established to try to address crime in the
area. The property managers and a
community action program manager in Eloy
indicated that Maddox Estates helps to
provide an additional option for affordable
housing in the area and provides amenities
that most other affordable housing
developments in the area cannot match,
such as a pool, a recreation area, and larger
apartments with more rooms that can
accommodate larger families. Also,
because Maddox Estates is one of the
newest developments in the area, the
individual units provide a nicer living
environment as compared to the other older
affordable housing opportunities in the
area. Even so, both property management
and a tenant noted occurrences of crime at
the development. The property manager
1 The Section 8 program provides rent assistance vouchers to very-low-income households to enable them to obtain
decent, safe, and sanitary housing.
Office of the Auditor General
page 21
Photo 3: Maddox Estates Development—Eloy
Source: Arizona Office of the Auditor General.
reported that a community block watch has been established to address the
issue.
CDBG projects meet community needs across the State
The State’s CDBG program helps to address the needs of Arizona’s rural
communities. The program uses federal dollars to fund eligible projects and
programs that serve low- and moderate-income persons. In state fiscal years 2003
through 2009, the program has facilitated the implementation of more than 430
projects and programs serving Arizona’s rural communities. Auditors’ case studies
of three projects found that they helped to serve and address community needs.
Department administers CDBG monies to address rural
communities’ needs—The State CDBG program provides rural
communities with resources to address a wide range of community development
needs, mainly targeted at low- and moderate-income populations. The CDBG
program’s primary statutory objective is to develop communities by providing
decent housing and a suitable living environment, and by expanding economic
opportunities, primarily for persons of low and moderate income. In fact, the State
must ensure that at least 70 percent of its CDBG grant funds are used for activities
that benefit low- and moderate-income persons. The State may also use its funds
to meet urgent community development needs, such as serious health or welfare
threats to the community. The Department is responsible for approving
applications that are eligible and meet national objectives and state priorities (see
Finding 2, pages 31 through 42). In state fiscal years 2003 through 2009, the
Department received approximately $13 million per year, on average, in CDBG
entitlement funds from HUD to fund eligible programs and projects in communities
located in the 13 rural counties in the State. Community projects that receive
CDBG funds vary greatly in scope and cost. For example, in state fiscal year 2009,
a Prescott Valley street improvement project was awarded more than $720,000 in
CDBG funds. In contrast, a Page park improvements project was awarded
$17,000 in that same year. In state fiscal year 2009, 59 projects received CDBG
funds through the Department.
The State CDBG program administered by the Department is available to
approximately 70 eligible units of local government, including cities, towns, and
counties in rural areas located outside of “entitlement” jurisdictions. The
Department’s policy is to allocate 85 percent of CDBG program monies to four
rural regions using a population and poverty-based formula, and the Department
works with the regions’ councils of government to determine how the monies will
be distributed.1 The remaining 15 percent is distributed competitively state-wide to
projects that are ready to implement immediately. Communities designated as
The State’s CDBG
program assists
communities and
individuals in the State’s
rural areas.
1 The four rural regions are (1) Gila and Pinal Counties, covered by the Central Arizona Association of Governments; (2)
Apache, Coconino, Navajo, and Yavapai Counties, covered by the Northern Arizona Council of Governments; (3)
Cochise, Graham, Greenlee, and Santa Cruz Counties, covered by the South Eastern Arizona Government Organization;
and (4) La Paz, Mohave, and Yuma Counties, covered by the Western Arizona Council of Governments.
State of Arizona
page 22
entitlement jurisdictions receive CDBG funds directly from HUD. Entitlement
jurisdictions in Arizona include all of Maricopa and Pima Counties; the cities of
Flagstaff, Prescott, and Yuma; and tribal lands. The Department does not
administer CDBG funds allocated to these areas.
CDBG dollars improve community services and opportunities—The
Department administered more than $83 million in CDBG grant monies on more
than 430 projects and programs in state fiscal years 2003 through 2009. As shown
in Figure 5 (see page 24), these monies have been used for projects and
programs throughout the State’s rural counties. The monies have been used to
assist communities in areas such as infrastructure, community, and individual
needs. See textbox for examples of how the CDBG monies can be used.
CDBG projects address specific community needs—Three case studies
of projects that received CDBG monies from the Department demonstrate the
results these projects have had in their communities. Specifically:
 Water system improvements reduce potential dangers in rural community—In
state fiscal year 2005, the Department awarded the City of Eloy more than
$340,000 in CDBG monies to engineer and install approximately 6,600 feet of
piping to connect the water distribution system in Eloy proper to the water
distribution system in one of its outlying areas called Toltec (see photo on
page 25).
Office of the Auditor General
page 23
CDBG Program
CDBG funds may be used to address a wide variety of community needs, including
construction or renovation of infrastructure projects such as:
water, wastewater, and solid waste facilities;
streets, sidewalks, and street lighting;
parks; and
flood control projects.
The funds may also be used for construction or improvements of community facilities such as:
senior, youth, and community centers; and
health and social services centers.
In addition, the funds may be used to serve individual citizens, such as:
creation or retention of jobs in carrying out an economic development project; and
owner-occupied housing rehabilitation and rental rehabilitation.
Source: Auditor General staff analysis of examples in HUD’s July 2002 guide to national objectives and eligible activities for State
CDBG program and the Department’s January 2009 CDBG application handbook.
State of Arizona
page 24
Figure 5: Number of CDBG Projects and Dollars Awarded
Fiscal Years 2003 through 2009
(In Thousands of Dollars)
(Unaudited)
1 Not applicable because the Department does not administer CDBG monies in Maricopa and Pima Counties.
These counties receive CDBG funding directly from HUD.
Source: Auditor General staff analysis of department CDBG project and award data.
1
1
The new piping has allowed the city to address safety and convenience issues.
Prior to installing the new piping, both water systems were operated as separate
and unconnected pressure zones with a single gas-powered pump to back up
the electric pumps. Therefore, when the system in Eloy went down because of
an electrical outage, citizens in Toltec lost running water, which presented both
cost and safety issues. According to an Eloy official, when the Toltec water
system would go out in the past, city employees would have to purchase bottled
water for distribution to all of the citizens of Toltec. The loss of water was also a
fire hazard because the lack of pressure would disrupt the source of water from
the fire supply line for the fire department. By connecting the water systems, Eloy
has been able to prevent the loss of water and any inconveniences or potential
dangers that come with it. According to a city official, the water system
improvements have worked as designed to prevent any additional instances of
water loss in Toltec. The official estimated that the system has been used three
or four times.
 Food bank provides needed nutritional resources to community—In state fiscal
year 2007, the Department awarded more than $340,000 in CDBG monies to
develop and construct a new building used to house a food bank serving low-income
persons in Tombstone and the surrounding communities (see photo on
page 26). In addition to food, the food bank also distributes clothing, diapers,
soap, shampoo, and medicine, which is all provided free to qualifying low-income
customers. The new food bank serves as a replacement for an older
food bank that was located in a run-down hospital that had become unsuitable
for food storage because of unsanitary conditions and because the number of
persons needing assistance was continuing to grow (see photo on page 26).
Office of the Auditor General
page 25
Photo 4: Section of Piping Connecting Water Systems in Eloy
Source: Arizona Office of the Auditor General.
According to food bank management, with the new building, the food bank has
been able to increase the amount of clients it can serve and meet a growing
needy population in the area. Management said a decline in tourism has meant
that many in Tombstone have lost their jobs or are under-employed.
The new building allows the food bank to
accept more donations and house more products. The
new food bank is required to stay open a minimum of 20
hours per week, which, according to food bank
management, is a substantial increase over the old food
bank’s hours. In addition, because of the new building’s
CDBG-funded construction , the food bank was also able
to obtain additional money from the U.S. Department of
Agriculture to purchase shelving and a refrigeration unit,
which will be used to store fresh produce. The old food
bank in Tombstone was not equipped to store fresh
produce and was not large enough to have a refrigeration
unit. According to food bank management estimates, the
food bank has been able to triple the number of clients it
can serve and meet a growing needy population in the
area.
 Job training program provides career opportunities—In state fiscal year
2006, the Department awarded the City of San Luis more than $22,000 in
CDBG monies to continue a public service construction training program
for youth. According to a program official, the program was initiated in
2003 with a HUD grant, but needed CDBG monies to continue the
program. Following the expenditure of CDBG monies, the program
received additional HUD grants to continue the job training program and
San Luis also agreed to contribute funding to the program from its own
resources. The program was structured to serve about ten
students at a time in an 8-month training cycle divided
equally between the classroom and on the job at
construction sites. The program required participants to
carry out community service projects, such as cleaning
parks and performing rehabilitation work on low-income
homes in the community, as well as participate in
leadership training. According to the application, the
program was designed to address dropout rates, and all
of the program’s participants would be from low-income
households and either dropping out of school or at risk for
dropping out. Program participants receive a High School
Equivalency Diploma (GED) after passing a series of tests
that are administered during the program, and the
program continues to offer GED-related help for 2 years
after program completion for participants who do not pass
the tests.
State of Arizona
page 26
Photo 5: Interior of New Tombstone Food Bank
Source: Courtesy of Community Food Bank.
Source: Courtesy of Community Food Bank.
Photo 6: Interior of Old Tombstone Food Bank
The job-training program has given the youth an opportunity to achieve career
success. Program stakeholders indicated that the program provides a great
opportunity for the students from low-income families to enhance their skills and
gain a marketable education. According to a program supervisor, another
important impact of the program is that it serves to open the students’ minds
and helps them see the great things that they can accomplish. Data provided
by a program official shows that 67 percent of the program’s enrollees have
graduated. In addition, program reports indicate that 1 or 2 years after program
completion, approximately 71 percent of graduates had found work or were
continuing their education. As of February 2010, in addition to the 10 students
who graduated in the CDBG-funded training cycle, 55 students had completed
the program.
Home purchase programs facilitate home ownership
The home purchase assistance programs, administered since the Department’s
inception in 2002, have aided more than 2,900 households in purchasing homes.
The Department’s two programs have helped first-time homebuyers using millions of
state and federal dollars.
Department programs provide home ownership assistance—In
addition to administering programs designed to provide affordable rental housing
opportunities and improve community services and infrastructure, the Department
has also created two programs targeted at assisting households in purchasing a
home. The first program—known as Homes for Arizonans—was started in 1998
and suspended in 2009. It used state monies from the Housing Trust Fund to
provide down payment assistance to first-time homebuyers in rural Arizona. The
second program—known as Your Way Home—was offered to the State’s rural
areas in May 2009 and state-wide beginning in July 2009. The program uses
federal stimulus monies to help individuals purchase foreclosed homes. Table 3
(see page 28) summarizes both programs’ expenditures by county since
inception.
Home purchase programs help Arizonans achieve home
ownership—Both of the Department’s home ownership programs have helped
citizens achieve home ownership. Specifically:
 Homes for Arizonans—The Department and the Arizona Housing Finance
Authority funded the first program, known as Homes for Arizonans, in an effort
to provide first-time homebuyers with down payment and closing cost
assistance in rural Arizona. The level of assistance under this program varied
Office of the Auditor General
page 27
The Department
administers a program
that uses federal
stimulus monies to help
individuals purchase
foreclosed homes.
based on the buyer’s income. Eligibility was based on income—generally
below 80 percent of the area’s median income. Buyers with higher
incomes were required to use the Arizona Housing Finance Authority’s
mortgage products and/or programs (see page 7 for information about
the Arizona Housing Finance Authority). The program was a rural
homebuyer initiative available in all areas of Arizona outside of Maricopa
and Pima Counties and was administered by a network of nonprofit
agencies and department staff. Buyers were required to contribute at least
$1,000 of their own money and participate in pre- and post-purchase
counseling. According to the Department, the program was suspended in
July 2009 to make way for the Your Way Home program (see page 29)
and, because of the uncertainty of its main funding source, the State
Housing Trust Fund (see page 9).
Homes for Arizonans helped many Arizonans become homeowners.
Since the Department’s inception in October 2002, the program provided
nearly $30 million to assist more than 2,500 households (see Table 3).1 The
Department distributed the greatest portion of these funds in Yuma
County, with more than $7.4 million used to assist 650 households.
1 The Homes for Arizonans Initiative originally started in 1998 under the Department of Commerce.
State of Arizona
page 28
County
Homes for Arizonans Your Way Home
Households
Assisted
Dollars
Expended
Average
Assistance
Households
Assisted Dollars Expended
Average
Assistance
Apache 111 $ 915,902 $ 8,251 1 $ 24,266.00 $24,266
Cochise 377 $ 4,106,696 $ 10,893 8 $ 202,917.00 $25,365
Coconino 115 $ 1,551,224 $ 13,489 8 $ 356,698.00
$44,587
Gila 19 $ 248,479 $ 13,078 NA NA NA
Graham 51 $ 673,314 $ 13,202 2 $ 49,940 $24,970
Greenlee 2 $ 27,805 $ 13,902 NA NA NA
La Paz 2 $ 25,803 $ 12,902 NA NA NA
Maricopa NA NA NA 160 $ 4,912,483.00 $30,703
Mohave 103 $ 1,724,080 $ 6,739 25 $ 729,806.26 $29,192
Navajo 250 $ 2,105,007 $ 8,420 12 $ 339,970.00 $28,331
Pima NA NA NA 121 $ 3,737,634.00 $30,890
Pinal 438 $ 5,363,747 $ 12,246 31 $ 702,285.60 $22,654
Santa Cruz 227 $ 3,213,089 $ 14,155 9 $ 222,980.00 $24,776
Yavapai 166 $ 2,274,381 $ 13,701 49 $ 1,530,991.00 $31,245
Yuma 650 $ 7,409,996 $ 11,400 36 $ 861,084.00 $23,919
Total 2511 $ 29,639,525 $11,804 462 $ 13,671,054.86 $29,591
Table 3: Home Purchase Assistance Expenditures by County
October 2, 2002 through July 17, 2009 (Homes for Arizonans)
June 25, 2009 through March 12, 2010 (Your Way Home)
Source: Auditor General staff analysis of Homes for Arizonans and Your Way Home data provided by the
Department.
Since 2002 the
Department has helped
over 2,500 families
purchase homes.
Although some homeowners aided by the program subsequently lost their
homes, the overall foreclosure rate appears to compare favorably with
performance across the broader population. In all, creditors have foreclosed on
106 homes that received assistance since the Department’s inception, which
represents a 4.2 percent foreclosure rate. However, 95 of the foreclosures (90
percent) took place during the turbulent housing years of 2008 and 2009 when
foreclosures across the country skyrocketed. By comparison, 6.17 percent of all
loans in Arizona were in foreclosure as of June 30, 2009.
 Your Way Home—The Department’s second homebuyer assistance program,
Your Way Home, is federally funded through the Neighborhood Stabilization
Program that was established by the federal Housing and Economic Recovery
Act of 2008 (HERA). The Department made this program available state-wide
beginning in July 2009. Through this program, the Department offers 22 percent
of the purchase price in assistance in the form of a deferred second mortgage
to qualified homebuyers to purchase an eligible foreclosed home. To be eligible,
buyers must have income no greater than 120 percent of the area’s median
income and must also complete an 8-hour homebuyer education class. The
Department has allocated $26 million of its HERA monies for this program. This
includes approximately $6 million reallocated from other Housing and Economic
Recovery Act uses. The Department decided to make this reallocation in
December 2009 because of high demand for purchasing foreclosed homes.
As of March 12, 2010, Your Way Home had facilitated 462 home purchases
across the State with nearly $13.7 million of the available $26 million expended
(see Table 3, page 28). The average assistance provided state-wide is
approximately $30,000 per home. The Department has assisted the largest
number of households in Maricopa County, with 160 households receiving
assistance. Pima and Yavapai Counties follow with 121 and 49 households
assisted, respectively. Federal law requires the State to use all HERA monies by
September 2010. According to Department officials, they expect to commit all of
the monies by this date and to expend them by the end of 2010.1
This finding contains no recommendations.
1 Public Law 110-289, Sec. 2301(c)(1), (42 U.S.C. §5301 Note), requires the monies to be obligated within 18 months of
being received. The Department’s official Your Way Home program start date was March 2009.
Office of the Auditor General
page 29
State of Arizona
page 30
Department has generally sound system for
planning, awarding, and monitoring housing
program resources
The Arizona Department of Housing (Department) has a generally sound system for
overseeing the housing programs it administers. Oversight of these programs is
critical because the Department does not provide services directly but instead relies
on other entities to carry out program goals through monies the Department
provides. The Department carries out its oversight in three main ways: developing
plans that specify what the State is trying to accomplish in these programs, ensuring
that monies are awarded to projects that are consistent with these plans, and
monitoring the use of monies once awards are made. In the four programs auditors
reviewed—the Low-Income Housing Tax Credit program (tax credit program), the
Community Development Block Grant program (CDBG), and state- and federally
funded home purchase assistance programs—these oversight mechanisms were
well designed and effectively carried out. Auditors did identify one minor discrepancy
between department policy and actual practice in the community development block
grant program. To fix this discrepancy, the Department should revise its policy rather
than change the practice it has been using.
Effective monitoring system is critical to ensuring effective
use of resources and program compliance
Because the Department generally does not provide housing services directly, but
instead awards federal and state resources to others to carry out program goals, it
needs to have effective mechanisms in place to ensure that these other entities are
meeting these goals. The amount of money and other resources involved, as well as
the programs’ complexity, make it all the more important for the Department to have
an effective system. For example, between 2007 and 2009, in the four programs
Office of the Auditor General
page 31
FINDING 2
auditors examined, the Department has awarded or has plans to award $126.4
million in federal low-income housing tax credits, CDBG, and home purchase
assistance monies (see Table 4 for a summary of awarded amounts of monies for
these four programs in 2007 through 2009).
State of Arizona
page 32
Year
Tax Credit
Allocations
CDBG
Home Purchase
Assistance
Homes for
Arizonans
Your Way
Home Total
2007 $14.3 $12.0 $7.1 $33.4
2008 14.7 11.8 5.3 31.8
2009 20.4 12.1 2.7 $26.0 61.2
Total $49.4 $35.9 $15.1 $26.0 $126.4
1 The tax credit allocations are the total allocations that the Department reported to the U.S. Internal Revenue Service
(IRS) for calendar years 2007, 2008, and 2009.
2 The annual CDBG monies are the amounts that the U.S. Department of Housing and Urban Development (HUD)
awarded to the State CDBG program for federal fiscal years 2007, 2008, and 2009, beginning on October 1, 2006,
and ending on September 30, 2009. The Department awarded or will award these CDBG monies during state fiscal
years 2008, 2009, and 2010 beginning on July 1, 2007, and ending on June 30, 2010.
3 The Homes for Arizonans monies represent the total amount of loans that the Department approved during
calendar years 2007, 2008, and 2009.
4 The $26 million in Your Way Home monies represents the amount the Department designated for mortgage
assistance loans out of its total $38.3 million federal Neighborhood Stabilization Program allocation, and not actual
loans made in 2009. The program became available in May 2009.
Source: Auditor General staff analysis of the Department’s IRS 8610 reports for the Low-Income Housing Tax Credit
program for 2007 through 2009, HUD allocation announcements from www.hud.gov, and department data for
the Homes for Arizonans and Your Way Home programs.
Table 4: Monies for Tax Credit Allocations, CDBG, and Home Purchase
Assistance Programs
2007 through 2009 1-4
(In Millions)
(Unaudited)
An effective oversight system needs to accomplish three primary goals: (1)
developing priorities for how the monies will be used and communicating program
requirements to potential applicants, (2) making award decisions consistent with
those requirements, and (3) monitoring projects’ or individuals’ use of the monies
after awards have been made. Before awards are made, the Department’s typical
activities include annual planning, developing application materials, and evaluating
applications. Once an award is made, the Department’s typical oversight activities
involve in-house monitoring activities, also known as “desk reviews,” on-site
monitoring, and project closeout. Because much of these programs’ funding comes
from the federal government, many components of the Department’s oversight
system involve carrying out federal requirements. Complying with these requirements
is an important part of ensuring these funds’ continued flow.
Department meets federal tax credit program set-aside
and long-term compliance monitoring requirements
The Department employs good planning and monitoring practices to meet federal
mandates associated with administering the federal tax credit program. Specifically,
the Department consistently complies with IRS requirements for setting aside tax
credit allocations for nonprofit developers, considering state needs in allocating tax
credits, and performing long-term monitoring of rental housing developments.
Department follows federal mandate and considers other state
priorities and needs when making awards—The Department has
consistently met the federal mandate to set aside 10 percent of tax credits for
nonprofit developers. In addition, based on its 2007 allocation decisions, it also
appears to consider areas of greatest need when making allocation decisions.1
Specifically,
 Federal nonprofit set-aside mandate consistently met—Between calendar
years 2003 and 2009, according to reports submitted to the IRS, the
Department allocated all of the available tax credits, except for $739,352 in
2009 that it can carry over and award in 2010. During those same years, it met
and often exceeded the federally mandated 10 percent set-aside requirement
for nonprofit housing developers.
 Department considers state needs when allocating tax credits—As required
by the Internal Revenue Code, 26 U.S.C. §42(m)(1)(A)(i), the Department sets
forth Arizona’s state-wide priorities annually in a Qualified Allocation Plan (see
textbox, page 34). These priorities show the desired mix of projects in rural,
urban, and tribal land areas; projects intended to serve seniors or special
needs populations; and projects by nonprofit developers.
Program oversight is
important in ensuring
the appropriate use of
state and federal
monies.
1 Auditors selected 2007 for in-depth analysis because it was unaffected by tax code amendments that resulted from the
passage of the Housing and Economic Recovery Act of 2008 (HERA).
Office of the Auditor General
page 33
In 2007, the Department met all of the state-specific set-aside goals established in
that year’s Qualified Allocation Plan. As shown in Table 5 (see page 35), that year,
the Department’s initial award decisions resulted in nearly 30 percent of the tax
credits going to projects that would benefit rural communities, which exceeded the
Qualified Allocation Plan’s goal of awarding at least 10 percent to such projects. In
addition, as shown in Table 5, the Department’s initial award decisions resulted in
almost 24 percent of available tax credits directed to nonprofit developers.1
Department monitors compliance with tax credit program’s long-term
requirements—The Department also meets federal tax code
requirements to monitor tax credit program projects’ use for at least 30 years.
During this mandatory 30-year compliance time frame, federal regulations require
state monitoring agencies to review annual certification reports, conduct periodic
on-site inspections that involve verifying tenant income and checking property
maintenance, and notify both the property owners and the IRS of any
noncompliance issues (see textbox, page 36, for U.S. Department of Treasury
compliance monitoring requirements).
1 The tax credit allocation information presented in Table 5 consists of the initial amounts awarded to housing developers
through the competitive allocation process, which may differ from a developer’s final allocation amount. Some
approved projects may in later years receive a supplemental award, known as a “director’s discretionary” award.
State of Arizona
page 34
Qualified Allocation Plan (QAP)
A QAP must: (1) set forth selection criteria to be used to determine housing priorities that are
appropriate to local conditions, (2) give preferences to the allocation of the tax credits to
lower-income households and distressed areas, and (3) provide a procedure the agency will
follow for monitoring compliance. The selection criteria in the QAP must include:
Project location;
Housing needs, project, and sponsor characteristics;
Tenant populations for individuals with children and with special housing needs;
Public housing waiting lists; and
Projects intended for eventual tenant homeownership.
The QAP must also incorporate public comment and receive a public hearing.
Source: Auditor General staff analysis of 26 U.S.C. §42(m) and the Department’s 2009 QAP.
The Department maintains a strong control environment for documenting and
performing the compliance monitoring activities that the IRS requires. For example:
 Procedures, manuals, and checklists in place—The Department has standard
operating procedures for its staff and a compliance manual for property owners
that thoroughly describe the regulatory requirements and monitoring activities.
For example, both manuals describe annual certification procedures and on-site
monitoring requirements. The compliance team uses a set of monitoring
checklists for both its annual desk reviews and periodic on-site inspections.
 Training provided—The Department conducts periodic training for property
owners to help them understand the compliance requirements.
 Tracking schedules used—The Department also maintains an on-site
monitoring schedule to identify the properties that will be subject to a review. The
Office of the Auditor General
page 35
QAP State-Specific Set-Aside Goal Applications Awards
# % # Amount %
Nonprofit 1 20 percent of the State’s annual credit
authority is set aside for “nonprofit
projects.”
At least
20%
5 11.4 4 $3,087,439 23.7%
Urban $4.5 million is available for projects
located in Maricopa and Pima Counties.
Projects also seeking funding from the
U.S. Department of Agriculture’s rural
development program will be classified
as rural.
$4.5 million
available
8 18.2 3 2,661,489 20.4%
Rural
Not less than 10 percent of annual credit
authority is set aside for projects to be
located in rural areas.
At least
10%
21 47.7 6 3,878,365 29.8%
Senior $1 million for senior projects allocating
100 percent of its units to Seniors (age 62
and over and handicapped) with Support
Services.
$1 million 4 9.1 2 1,046,911 8.0%
Tribal A total of $1.5 million was allocated for
projects located on Tribal Lands.
$1.5 million 4 9.1 2 1,457,629 11.2%
Special Needs A total of $900,000 is available for
projects allocating 100 percent of their
units to Special Needs Populations.
$900,000
available
1 2.3 1 900,000 6.9%
General None specified. Applications that do not
fall within a specific set-aside category
are considered general applications.
1 2.3 0 $0 0
Total 44 100 18 $13,031,833 100
Table 5: 2007 Initial Tax Credit Awards Compared to 2007 QAP Set-Aside Goals
(Unaudited)
1 Except for the nonprofit set-aside category, all other set-aside categories are established at the Department’s discretion as part of the
annual QAP revision process. Federal tax code IRC §42(h) requires 10 percent of the State’s annual tax credit ceiling to be set aside for
nonprofit housing developers.
Source: Auditor General staff analysis of QAP 2007 set-aside goals, 2007 application information by set-aside, 2007 tax credit reservation
lists, and Internal Revenue Code 26 U.S.C.§42(h).
tracking schedule identifies the inspection date, the responsible staff, the dates
that the Department sends out finding notification letters, and if applicable, the
date it sends a noncompliance report to the IRS.
This control environment produces results. Auditors found that the Department
conducts thorough on-site inspections and takes appropriate action when it
discovers problems. For example, during one project’s on-site inspection in October
2009, compliance officers conducted physical inspections of 51 occupied and 11
vacant units out of a total 102 tax credit units and reviewed tenant files for the 51
occupied units. The number of units inspected met the federal standard that requires
the monitoring agencies to inspect each building in a property and exceeded the
State of Arizona
page 36
Rental Housing Tax Credit Program Compliance Monitoring Requirements
Federal regulations require tax credit program compliance monitoring programs
to include four key provisions:
1. Recordkeeping and record retention—A property owner must
maintain documentation specified in the federal regulation at least
6 years after federal tax return due dates.
2. Annual certifications and reviews—A property owner must submit
an annual report to the state agency certifying the building’s
continued use as an affordable rental property, and the State
agency must review the reports.
3. On-site inspections—Two years after a building has been placed
into service, and every 3 years afterward, state agencies should
conduct on-site inspections that involve:
Income verifications performed on a random sample of 20
percent of the building’s designated low-income units.
Physical inspections of the units selected for the file review.
The inspections must follow the Uniform Physical Condition
Standards (UPCS) protocol.
4. Notification of noncompliance—Give prompt written notice to a
property owner of any noncompliance issues found in annual
reports and on-site inspection. State agencies are required to
submit notices of noncompliance to the Internal Revenue Service
(IRS) 45 days after the expiration of a 90-day correction period,
even if the noncompliance was corrected during the correction
period. If property owners resolve a noncompliance issue within 3
years, the IRS requires the State to submit a “back-in-compliance”
report.
Source: Auditor General staff analysis of 26 C.F.R. §1.42.5 and The IRS Guide for Completing Form 8823
Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition (October
2009).
federal minimum standard of inspecting and reviewing records for a minimum of 20
percent of the low-income units. The Department found income verification issues in
more than half of the sample, such as files without information about child support
income or files showing incorrect calculations for the amount of rent that tenants
should be paying. Similarly, the Department identified physical inspection issues in
nearly half of the units reviewed, such as dysfunctional fire alarms, damaged locks,
and damaged appliances.1
Finally, the Department reports properties’ compliance to the IRS, which decides
whether to take action against noncompliant properties. If, within 3 years, a property
owner completely addresses the noncompliance issues, federal regulations require
the Department to submit a “back in compliance” report. For noncompliant
properties, the IRS can withdraw or reduce the amount of tax credits allowed.
Department records show that between December 2006 and November 2009, the
Department reported 27 noncompliant properties to the IRS—meaning properties
that had not corrected their noncompliance during the 90-day correction period—of
which 18 were reported as “back in compliance.” A department compliance official
reported that during her tenure, she was aware of only two rental properties that have
been the subject of an IRS action, such as an audit or the revocation of tax credits.
Department provides appropriate oversight for CDBG
program
The Department has effective mechanisms in place to administer the CDBG program
and monitor projects, and its practices have improved over time. The Department
uses appropriate tools and practices to review CDBG applications, assess project
eligibility, and conduct in-house and on-site CDBG monitoring. The Department
meets its in-house monitoring duties and has improved such practices over time.
Auditors identified one issue—the number of on-site inspections to be conducted—
in which the Department needs to align its policy with actual practice.
Department uses appropriate tools and practices for planning,
allocation, and eligibility determination—The Department meets the
U.S. Department of Housing and Urban Development’s (HUD) annual planning
requirements, and it assesses funding applications to ensure they meet CDBG
eligibility and national objective requirements. For example:
Department inspections
of one tax credit
property found
problems in
approximately half of the
files and units.
1 Followup on these findings was under way as this audit was being completed. The Department communicated its
findings to the property owners on November 5, 2009. The owners are required to respond to the findings within 45 days
of receiving the Department’s notification letter. The Treasury regulations allow for a total 90-day correction period to
respond to any findings, and the IRS requires the Department to submit a report detailing any outstanding
noncompliance issues no later than 45 days after the end of the correction period. As of March 3, 2010, the Department
anticipates that the property owners will have corrected the issues identified during the site visit, and also anticipates that
the Department will submit a report to the IRS that will comment on the property’s status.
Office of the Auditor General
page 37
 Five-year planning completed with required public input—HUD requires the
State to develop a 5-year plan that sets forth state priorities for CDBG monies
and to submit an updated action plan annually during this 5-year time frame
to identify annual objectives and expected accomplishments the State hopes
to achieve. HUD requires that the Department seek public input into its 5-year
plans. The State’s 2005-2009 Consolidated Plan describes the public
participation efforts that the Department undertook prior to completing that 5-
year plan. The State intends to submit its 5-year planning document for the
period 2010 through 2014 to HUD on May 15, 2010. In September 2009,
auditors observed the public meeting the Department scheduled to obtain
input for that 5-year planning document.
 CDBG eligibility aligned with national objectives—Although federal rules allow
CDBG monies to be used for more than 25 kinds of activities, all such activities
must still meet a national objective of (1) addressing the needs of low- to-moderate
income families, (2) mitigating slum and blight conditions, or (3)
addressing an urgent community need. The Department’s application review
procedures ensure that projects meet CDBG eligibility requirements and
national objectives, as well as the State’s priorities as set forth in the 5-year
plan, prior to awarding CDBG funds. During the application review process, a
project specialist and then the management team reviews the CDBG project
applications to assess (1) the projects’ eligibility under both federal
requirements and state priorities, and (2) the communities’ readiness to begin
a project and the communities’ need for technical assistance (see Introduction
and Background, page 4, for the CDBG program’s description).
The guidance used in making these determinations—as well as in helping
applicants prepare—is strong. The Department’s CDBG staff rely on
comprehensive guidance documents, including an administrative handbook and
standard operating procedures. Further, the Department produces a CDBG
application handbook to assist the communities that apply for CDBG monies. Both
the internal and external guidance documents provide thorough information about
CDBG application requirements, contract development, in-house review, and on-site
monitoring requirements.
Department uses appropriate tools to meet required in-house review
duties—After the Department verifies eligibility, approves a project contract, and
awards the funding, the Department monitors the project’s progress and
expenditures to ensure compliance with contract provisions and HUD
requirements. The Department has appropriate tools to perform these duties. For
example, the Department has monitoring checklists that cover a variety of contract
provisions and federal requirements, such as procurement, labor reviews,
environmental reviews, and project expenditures, as well as on-site monitoring
checklists designed to check similar activities during a site visit. In addition, the
Department updates its procedures as needed.
State of Arizona
page 38
The Department’s in-house monitoring activities appear to be effective and
performed in accordance with department policies. The Department monitors
projects for (1) compliance with administrative requirements such as procurement,
labor standards, and environmental reviews; (2) project progress; and (3)
appropriateness of expenditures. Specifically, for the five projects approved
between fiscal years 2004 and 2007, auditors examined the following in depth:1
 The Department ensured that the required procurement, labor standards, and
environmental reviews were completed; and provided technical assistance to
community officials during each project.
 The Department ensured that projects were making satisfactory progress and
payment requests were properly supported and authorized prior to releasing
CDBG monies. In one of the five projects, the Department issued a warning
letter that could have resulted in the withdrawal of CDBG funds. Specifically,
while monitoring a town water system improvement project, the Department
sent town officials a Failure to Progress letter to inform them that the project
was not proceeding in a timely fashion. Had town officials not addressed the
timeliness issues, the Department reported that it no longer would have
provided funding for the project, and would have required the community to
repay any monies it had already received.
Finally, the Department’s in-house review activities appear to have improved over
time. When looking at the 2004 through 2007 project file folders sequentially, the
files associated with each project show progressive improvement, such as fewer
clerical errors, neater and more consistent organization, and an easier ability to
track project history.
Department should better align policy with on-site monitoring
practice—The Department’s actual on-site monitoring practices do not
consistently align with its policy. The Department’s policies require its project
specialists to conduct two on-site monitoring visits to each CDBG project.
However, in four of the five projects auditors reviewed, specialists conducted only
one on-site visit. CDBG specialists explained that many project-monitoring
activities can be performed in-house rather than through an on-site monitoring
visit. They said that some “problem projects” require and receive more frequent
on-site monitoring. However, in other cases, documentation received through the
mail, for example, can adequately verify compliance, progress, and expenditures.
This appears to be a situation in which the policy should be revised to reflect actual
practice rather than changing the practice to conform with written policy. In the four
projects auditors reviewed that had only one site visit, a variety of administrative
controls were in place in addition to the site visit to help ensure appropriate project
oversight. For example, for all four projects, the file documentation supported that
the Department had assessed the communities’ ability to complete the projects. In
CDBG projects are
monitored in several
areas to ensure
appropriate use of
federal grant monies.
1 Auditors reviewed case files for five closed-out CDBG projects from program years 2004 through 2007. Auditors selected
four projects from the CDBG formula allocation category awarded to Bullhead City, Eloy, Prescott Valley, and Willcox, and
one project from the competitively awarded category awarded to the Town of Parker.
Office of the Auditor General
page 39
addition, the files included checklists that provided evidence of monitoring
required labor and environmental reviews, and periodic quarterly progress reports.
These administrative controls were sufficient to ensure the project met department
requirements even though department staff only conducted one on-site visit. The
Department should revise its standard operating procedures and its administration
handbook to reflect the on-site monitoring practice it is currently following.
Department’s various monitoring types provide
appropriate oversight for home purchase assistance
programs
The Department relies on several types of monitoring, including monitoring
conducted through a Web application, to oversee the day-to-day activities of the
lenders and nonprofit counseling agencies that perform key functions in home
purchase assistance programs. While the Web application is new with the Your Way
Home program, the Department continues to use other more traditional monitoring
tools.1 Finally, the Department also monitors the borrower’s compliance with loan
terms over the long-term, including any payoffs, if required.
Department relies on a Web site to monitor some third-party
contractor decisions and lending activities—Starting in May 2009, the
Department began to use a Web-based application as its primary mechanism for
monitoring the decisions and activities of the third-party lenders and counseling
agencies involved in the federally funded Your Way Home program. The
Department uses the Web site to oversee two main aspects of the program:
 Transfer of applicant information and program documents—The
Department’s loan staff use the Web site to receive application information
from the primary lender in an electronic format. The information is reviewed
according to program guidelines and compared to what the housing
counseling agencies send in to the Department. According to department
staff, they check the borrower’s income, as reported to them by the primary
lender and housing counseling agencies, to make sure the borrower falls
within the required income eligibility limits.2 Additionally, the Department posts
the loan program documents it generates to the Web site for the housing
counseling agencies to retrieve.
Administrative controls
ensure projects meet
department
requirements.
1 The Department suspended the Homes for Arizonans program in July 2009 because of the launch of the federally funded
Your Way Home loan program and uncertainty about the State Housing Trust Fund’s status as a continued source of
funding.
2 The Department relies on the contracted housing counseling agencies to check physical documents to verify borrowers’
income. For example, the counseling agencies must review the borrower’s pay stubs, income-tax statements, and bank
statements, and verify the borrower’s employment. Because the counseling agencies’ activities take place after a primary
lender has pre-qualified the borrower for a first mortgage, the borrower’s documents and employment are verified twice.
State of Arizona
page 40
 Tracking borrower and loan status—The Department uses the Web site to
monitor how many households its preferred lenders have pre-qualified for a
first mortgage and referred to nonprofit housing counseling agencies.
Similarly, it also uses the Web site to track how many households its
contracted housing counseling agencies are pre-qualifying and certifying for
a second mortgage to begin the home-buying process. To be certified, an
applicant must complete a mandatory home-buyer education class.
Department also performs more traditional in-house monitoring of
contracted nonprofit housing counseling agencies—As it did in the
suspended state-funded Homes for Arizonans program, the Department also
continues to use more traditional tools to oversee the third-party, nonprofit housing
counseling agencies involved in Your Way Home. In both programs, the
Department has contracted only with nonprofit agencies that HUD has certified as
meeting requirements associated with the federal Housing Counseling Assistance
Program. In addition to requiring such HUD certification, contracts for both loan
programs show that the Department requires the agencies to provide homebuyer
education, marketing, borrower qualification, and borrower assistance, such as a
property inspection.
The Department’s review of the contracted agencies mainly involves reviewing two
types of documents:
 Monthly progress reports—In the Homes for Arizonans program, the
counseling agencies must submit monthly progress reports that provide
information on such things as the number of borrowers served and the total
loans processed. The agencies would receive their monthly administrative fee
only after the Department had received the required monthly progress report.
A review of the Homes for Arizonans contract files for the three counseling
agencies for the 2-year contract period spanning July 2006 through June 2008
showed that all three agencies submitted reports for all 24 months included in
the 2-year time frame.
 Loan closeout documentation—In contrast to the Homes for Arizonans
program, the Department reports that it has opted not to require its contracted
agencies to submit monthly progress reports in the Your Way Home program.
Although the Department included this requirement in its contract and
administrative manual, a key department official explained that the
Department opted not to require the reports because it receives sufficient loan
progress information through the Web site and final loan closeout documents.
In lieu of monthly progress reports, the Department instead requires the Your
Way Home housing counseling agencies to submit a loan closeout packet
that includes the executed promissory note and deed of trust. The packet also
Department contracts
with HUD-certified
nonprofit organizations.
Office of the Auditor General
page 41
includes documentation to support reimbursement for activities the
counseling agencies performed for the borrower, such as a property
inspection. The Department relies on a checklist to review the information the
counseling agencies submit in the closeout packet, and a review of eight Your
Way Home loan closeout packets’ documents showed evidence that
department staff reviewed all of the information they required the agencies to
submit to support their reimbursement.
Department monitors loan payoffs, as required—Finally, in the state-funded
Homes for Arizonans program, the Department has taken appropriate
action to ensure that borrowers meet the required payoff terms when events take
place that would change the homeowner’s status as the homeowner.1 Although
the loan program does not have a term, it nonetheless places a permanent lien on
the property that must be repaid if the home is sold. The loan must also be repaid
in the event of a foreclosure. The Department reported that it had received $1.78
million in Homes for Arizonans payoffs during the period January 1, 2002 through
December 31, 2009.
Recommendation:
2.1. The Department should align on-site monitoring policies with on-site monitoring
practices by revising its standard operating procedures and its CDBG
administration handbook.
1 The federally funded Your Way Home program was too new at the time of the audit to assess whether the Department
took appropriate steps to meet required payoff terms.
State of Arizona
page 42
Office of the Auditor General
page 43
SUNSET FACTORS
In accordance with Arizona Revised Statutes (A.R.S.) §41-2954, the Legislature
should consider the following 12 factors in determining whether the Arizona
Department of Housing (Department) should be continued or terminated.
1. The objective and purpose in establishing the Department.
The Department was established in 2002 to address the affordable housing
issues confronting the State and to provide greater coordination and innovation
of housing-related services at the state level.1 Prior to that time, the Department
of Commerce performed the Department’s functions.
To address affordable housing issues, the Department acts as a pass-through
agency for state and federal monies and oversees compliance for several
housing programs. The state and federal monies are used for projects that
range from assisting individuals in becoming homeowners or assisting
individuals facing mortgage, rental, or emergency housing problems to
developing new affordable housing for seniors or others with special needs.
Projects can also focus on community revitalization and include projects such
as building food banks or developing or improving community infrastructure. In
addition to administering state and federal housing and community programs,
the Department provides technical assistance to communities, and serves on
councils and commissions that address affordable housing needs.
2. The effectiveness with which the Department has met its objective and purpose
and the efficiency with which it has operated.
The Department has generally met its objective and purpose. This audit
identified a need for a minor policy change in one program to bring policy into
alignment with its oversight practices, which are sound.
The Department has met its objective of addressing the affordable housing
issues confronting the State by overseeing a variety of housing programs
including:
 Low-Income Housing Tax Credit program (tax credit program)—This U.S.
Internal Revenue Service program, which the Department administers in
1 The same 2001 bill that established the Department, Laws 2001, Ch. 22, §14, also established the Arizona Housing
Finance Authority (Authority) in §12. The Authority was established to issue bonds or certificates, or provide financial
assistance for housing purposes and to temporarily acquire title to real property, among other duties. Although the
Authority is staffed by the Department, it is a separate entity from the Department and is not subject to sunset review.
State of Arizona
page 44
Arizona, awards federal tax credits to affordable housing developers. The
credits are sold to investors, and the proceeds are used to finance the
construction or acquisition and rehabilitation of rental units for low- to
moderate-income households. This audit found that the tax credit program
has provided additional affordable housing opportunities for low-income
individuals and families, the elderly, and special needs populations (see
Finding 1, pages 13 through 30). In calendar year 2003, the Department’s
first full year as a stand-alone agency, it awarded $9.4 million in tax credits
to projects to develop or rehabilitate 1,190 affordable housing units, and
since 2003, it has awarded nearly $82 million in annual tax credits and
developed approximately 6,800 low-income housing units. For example,
one 2003 project developed an 89-unit apartment complex in Sierra Vista
serving predominantly families earning 60 percent or less of the area’s
median income.
 Community Development Block Grant program (CDBG)—From fiscal year
2003 through 2009, the Department reported that it had distributed over
$86 million in U.S. Department of Housing and Urban Development (HUD)
block grant monies to support over 430 projects throughout the State.
These grant monies have been used for a wide variety of projects to meet
the national program’s objectives: benefiting low- and moderate-income
people, addressing slum or blight conditions, or addressing urgent
community development needs. According to the Department, most CDBG
projects tend to be directed toward benefiting low- and moderate-income
people. See Finding 1, pages 13 to 30, for additional information on this
program’s impact.
 Home ownership assistance programs—The Department’s home
ownership assistance programs include the Homes for Arizonans program,
which was available from 1998 until July 1, 2009, and the Your Way Home
program, which was implemented in fiscal year 2009 using federal stimulus
monies. Homes for Arizonans offered first-time home buyers assistance
through no-interest loans that only needed to be repaid upon sale of the
property or violation of program requirements. Since its establishment in
2002, the program has helped over 2,900 households purchase homes.
The Your Way Home program helps qualified homebuyers purchase
eligible foreclosed homes and as of March 12, 2010, had distributed nearly
$13.7 million of the available $26 million to individual home buyers.
 Special needs and homeless programs—Homelessness and other special
needs are addressed through four programs that provide monies to local
governments, nonprofit organizations, and public housing authorities.
These programs provide rental assistance and other services to people
with HIV/AIDS, homeless people with disabilities, and people making a
transition from homelessness to independent living. First, the Housing
Office of the Auditor General
page 45
Opportunities for Persons with AIDS (HOPWA) program provides funding to
nonprofit organizations to assist individuals with HlV/AIDS. Second, a
continuum of care process provides Shelter Plus Care and Supportive
Housing Program grants to pay for housing and services such as
healthcare, employment assistance, and child care. Third, Eviction
Prevention/Emergency Housing grants, which according to the Department
will be discontinued in June 2010, provide rental security deposits, utility
payments, landlord-tenant mediation, household management assistance,
or other services that helped to deter homelessness. Fourth, the
Department is administering federal stimulus monies for the Homeless
Prevention Rapid Re-housing Program, which assists low-income families
in retaining or securing housing.
The audit found that the Department could improve CDBG program oversight
by better aligning its policies with its on-site monitoring practices.
3. The extent to which the Department has operated within the public interest.
The Department operates within the public interest by administering several
programs that improve living conditions, reduce blight, and assist communities
throughout Arizona. For example, programs in the rental development area
assist low- and middle-income residents by making safe, affordable housing
available through development projects. The CDBG program improves
communities by, for example, establishing or upgrading water and sewage
systems and establishing or improving other facilities such as libraries, parks,
and community centers.
According to the Department, it also operates within the public interest by
stimulating the economy through adding jobs and tax income to the State. For
example, the tax credit program provides developers with a way to finance low-income
rental developments, which creates jobs in areas such as construction,
inspection, and building and equipment supplies. The Department also acts in
the public interest by conducting oversight of these developments to ensure
they are in compliance with federal regulations and restrictions.
In the home purchase area, the Department operates within the public interest
by administering the federal stimulus monies earmarked for the foreclosure
crisis by providing Arizonans facing mortgage foreclosure access to counseling
services. In areas hardest hit by foreclosure, the Department’s Your Way Home
program, funded by the federal Neighborhood Stabilization Program, helps
homebuyers buy foreclosed properties, and as of March 12, 2010, the program
had assisted 462 families purchase homes. Department programs also address
the housing crisis through rental subsidies and ongoing support services that
assist the formerly homeless.
State of Arizona
page 46
The Department also serves as a Public Housing Authority, which oversees two
HUD Section 8 programs.1 Specifically:
 The Department provides administrative oversight to more than 7,900
individual rental units in approximately 110 HUD-subsidized rental
properties throughout Arizona. The Department must assure that the
housing is maintained as safe, decent, affordable housing. In addition, the
Department reports that it conducts management and occupancy reviews
on each property and responds to tenant complaints. Finally, the
Department serves as an information source for landlords and Section 8
voucher recipients.
 The Department administers the Section 8 Housing Choice Voucher
Program for Yavapai County. This program provides rental subsidies for
very low-income households so that participants’ rent and utilities expense
is limited to 30 percent of their adjusted gross income. Participants receive
vouchers that may be used at any qualified rental property in Yavapai
County. The Department processes the payments, provides information to
landlords and recipients, maintains waiting lists, and annually both
recertifies participants and inspects housing units.
4. The extent to which rules adopted by the Department are consistent with the
legislative mandate.
The Department has authority to promulgate rules, but it is not required to do so.
A.R.S. §§35-728(A)(1) and 41-3953(C)(12) give the Department rule-making
authority, but the Department has not promulgated any rules.
5. The extent to which the Department has encouraged input from the public
before adopting its rules and the extent to which it has informed the public as to
its actions and their expected impact on the public.
Although the Department has not promulgated any rules, it obtains public input
and informs the public of its actions in several ways, including:
 Web site—The Department maintains a Web site at www.azhousing.gov
that contains information intended to inform the public of its actions,
including information about upcoming trainings and free educational
sessions. In addition, it posts information on notices and deadlines, such
as notices of funding availability, public comment periods, and deadlines
for applications for various types of housing funding.
 Qualified Allocation Plan (QAP) public hearings—Annually, the Department
develops a Qualified Allocation Plan for the tax credit program that sets
1 The U.S. Housing Act of 1937, Section 8, authorizes rental voucher and existing housing programs intended to help low-income
households choose and rent safe, decent, and affordable housing. Regulations are found in 24 C.F.R. Part 982,
and the programs are administered by HUD’s Office of Public and Indian Housing.
Office of

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Debra K. Davenport
Auditor General
Performance Audit and Sunset Review
Arizona Department
of Housing
Performance Audit Division
June • 2010
REPORT NO. 10-05
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Audit Staff
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
Melanie M. Chesney, Director
Shan Hays, Manager and Contact Person
Anne Hunter, Team Leader
Monique Cordova
Winter Morris
Marc Owen
Representative Judy Burges, Chair Senator Thayer Verschoor, Vice Chair
Representative Tom Boone Senator John Huppenthal
Representative Cloves Campbell, Jr. Senator Richard Miranda
Representative Rich Crandall Senator Rebecca Rios
Representative Kyrsten Sinema Senator Bob Burns (ex efficio)
Representative Kirk Adams (ex efficio)
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
June 2, 2010
Members of the Arizona Legislature
The Honorable Janice K. Brewer, Governor
Mr. Michael Trailor, Director
Arizona Department of Housing
Transmitted herewith is a report of the Auditor General, a Performance Audit and Sunset
Review of the Arizona Department of Housing. This report is in response to a November 3,
2009, resolution of the Joint Legislative Audit Committee. The performance audit was
conducted as part of the sunset review process prescribed in Arizona Revised Statutes
§41-2951 et seq. I am also transmitting within this report a copy of the Report Highlights for
this audit to provide a quick summary for your convenience.
As outlined in its response, the Department of Housing agrees with the findings and plans
to implement the report’s one recommendation.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on June 3, 2010.
Sincerely,
Debbie Davenport
Auditor General
Attachment
Low-Income Housing Tax Credit
program—Through this federal program,
developers agree to hold a portion of their
rental units for low-income households,
which earn at or below 60 percent of the
area’s median income. These households
pay an “affordable rent” based on the
area’s median income and the number of
persons and bedrooms in the unit. For
example, 50 percent of the median
income for Maricopa County for one
person is $23,050, and the maximum rent
he/she would pay is $576 for a studio unit.
In exchange, the developer receives a
federal tax credit that can be sold to
investors to raise proceeds to build rental
properties.
Since 2003, the Department has awarded
nearly $82 million in federal tax credits,
helping to develop about 7,000 low-income
housing units. The Department
has distributed these projects throughout
the State with 66 percent located outside
Maricopa and Pima Counties.
The report describes three recent
examples of these projects:
 Matthew Henson Development—A 549-unit
project with 445 units reserved for low-income
households. Replacing an existing
1940s-built, low-income housing project,
Phoenix city officials reported that this
development has helped revitalize the
downtown area surrounding it.
 Page Commons—A 100-unit senior housing
complex located in downtown Gilbert that
addressed the need for affordable housing
for a growing population of seniors. This too
revitalized the downtown Gilbert area,
according to Gilbert officials.
Maddox Estates Townhomes—A 60-unit
project that helped address a serious need
2010
June • Report No. 10 - 05
Arizona Department
of Housing
Our Conclusion
The Arizona Department of
Housing (Department) was
created in 2002 and
administers housing
programs that have
increased affordable
housing opportunities and
improved community
services. The Department
generally does not provide
direct services but instead
acts as a “pass-through”
agency for various services
and programs—many
targeting the State’s rural
areas. We reviewed four of
the Department’s largest
programs: Low-Income
Housing Tax Credit,
Community Development
Block Grant, and two home
purchase assistance
programs. We found that
these programs have
increased affordable
housing opportunities—
especially for low-income
housing—and have
facilitated over 430 projects
during state fiscal years
2003 through 2009 that
have improved community
services in Arizona’s rural
communities. Further, the
Department has a
generally sound system for
overseeing the programs it
administers.
REPORT
HIGHLIGHTS
PERFORMANCE AUDIT
Affordable housing increased and communities
enhanced
for affordable housing in Eloy. The
development accommodates larger families
and provides a pool and recreation area
that other housing in the area does not.
Community Development Block Grant
(CDBG)—This federal community
revitalization program provides grants to
benefit low- and moderate-income people
by alleviating slum conditions and
addressing urgent community needs in
Arizona’s rural counties. For example, in
2005, the Department awarded the City of
Eloy more than $340,000 to connect its
water distribution system to an outlying
area called Toltec. Before the connection,
whenever the Toltec water system would
malfunction, Eloy employees had to
purchase bottled water and deliver it to
Toltec residents who ran out of water. It
also created a fire hazard in Toltec
because it would disrupt the source of
water for fighting fires. The water
connection construction has ensured a
continuous supply of water to Toltec in the
event of a system malfunction.
The report also describes CDBG grant
monies to a food bank serving low-income
Photo 1: Matthew Henson
Development—Phoenix
Source: Courtesy of Matthew Henson Apartments.
Department effectively plans, awards, and monitors
resources
REPORT
HIGHLIGHTS
PERFORMANCE AUDIT
June 2010 • Report No. 10 - 05
page 2
The Department has developed effective systems
for overseeing the housing programs it administers.
For example, the Department maintains a strong
control environment over the low-income housing
tax credit program to ensure compliance with
federal Internal Revenue Service requirements
regarding eligibility and monitoring. The
Department:
 Has developed written operating procedures for staff
and compliance manuals for developers, and
 Provides training for property owners.
The Department also conducts thorough on-site
inspections and takes appropriate action when it
discovers problems. For example, at one
development, department inspectors reviewed a
random sample of 62 of 102 tax credit units,
including reviewing tenant files to ensure eligibility
and physically inspecting the units. The Department
discovered income verification problems in more
than half the sample and problems with about half
of the units’ physical conditions.
The State has a 5-year plan for CDBG money that
addresses the needs of low- to moderate-income
persons and addresses slums and urgent
community needs. Department staff also follow
comprehensive guidelines to review projects and
takes actions if there is not satisfactory progress. In
one instance, the Department issued a Failure to
Progress letter to a town whose water system
improvement project was not proceeding in a timely
manner. If the town had not addressed the
timeliness issues, it would have lost funding and
had to repay the monies it had already received.
The Department also oversees lenders and
nonprofit counseling agencies helping low-income
persons to purchase homes. It does this primarily
by using the Internet to receive application
information from the lenders and reviewing the
information to ensure borrowers fall within the
required income guidelines.
A copy of the full report is available at:
www.azauditor.gov
Contact Person:
Shan Hays (602) 553-0333
persons in Tombstone and a construction-job-training
program for youth in the City of San Luis
that has promoted the graduation of at-risk
students.
Home purchase programs help Arizonans buy
homes—The Homes for Arizonans program
provided a portion of the down payment on a home
to first-time homebuyers in rural Arizona, and
between 2002 and 2009, it provided $30 million in
assistance to 2,500 households.
In July 2009, this program gave way to a program
using federal stimulus money to help individuals
purchase foreclosed homes. Under the Your Way
Home program, the Department offers 22 percent of
the purchase price in the form of a deferred second
mortgage to buyers who are at or below 120
percent of the area’s median income. As of March
2010, 462 homes have been purchased with an
average assistance of about $30,000 per home.
Arizona Department
of Housing
Office of the Auditor General
TABLE OF CONTENTS
page i
continued
1
13
13
22
27
31
31
33
37
40
42
43
Introduction & Background
Finding 1: Department programs increase housing
opportunities and enhance communities
Tax credit program provides affordable housing opportunities across the
State
CDBG projects meet community needs across the State
Home purchase programs facilitate home ownership
Finding 2: Department has generally sound system for
planning, awarding, and monitoring housing program
resources
Effective monitoring system is critical to ensuring effective use of
resources and program compliance
Department meets federal tax credit program set-aside and long-term
compliance monitoring requirements
Department provides appropriate oversight for CDBG program
Department’s various monitoring types provide appropriate oversight for
home purchase assistance programs
Recommendation
Sunset Factors
State of Arizona
TABLE OF CONTENTS
continued
Appendix A: Additional programs and resources
Appendix B: Table 6
Appendix C: Methodology
Agency Response
Tables:
1 Schedule of Revenues, Expenditures, and Changes in Fund Balance
Fiscal Years 2008 through 2010
(Unaudited)
2 Housing and Economic Recovery Act of 2008
Neighborhood Stabilization Funding by Jurisdiction
Fiscal Year 2008
(Unaudited)
3 Home Purchase Assistance Expenditures by County
October 2, 2002 through July 17, 2009 (Homes for Arizonans)
June 25, 2009 through March 12, 2010 (Your Way Home)
4 Monies for Tax Credit Allocations, CDBG, and Home Purchase
Assistance Programs
2007 through 2009
(In Millions)
(Unaudited)
5 2007 Initial Tax Credit Awards Compared to 2007 QAP Set-Aside Goals
(Unaudited)
page ii
a-i
b-i
c-i
8
11
28
32
35
Office of the Auditor General
page iii
TABLE OF CONTENTS
continued
b-i
c-iii
3
16
17
18
24
Tables (Continued):
6 U.S. Department of Housing and Urban Development
Allocations for All Arizona Jurisdictions
Federal Fiscal Year 2009
7 CDBG Projects Reviewed
Fiscal Years 2004 through 2007
Figures:
1 Department of Housing Activities, Programs, and Resources
As of March 31, 2010
2 Locations of Tax Credit Program Developments State-wide
Calendar Years 2003 through 2009
(Unaudited)
3 Locations of Tax Credit Program Developments in Phoenix Metro Area
Calendar Years 2003 through 2009
(Unaudited)
4 Locations of Tax Credit Program Developments in Tucson Metro Area
Calendar Years 2003 through 2009
(Unaudited)
5 Number of CDBG Projects and Dollars Awarded
Fiscal Years 2003 through 2009
(In Thousands of Dollars)
(Unaudited)
State of Arizona
TABLE OF CONTENTS
concluded
Photos:
1 Matthew Henson Development—Phoenix
2 Page Commons Development—Gilbert
3 Maddox Estates Development—Eloy
4 Section of Piping Connecting Water Systems in Eloy
5 Interior of New Tombstone Food Bank
6 Interior of Old Tombstone Food Bank
page iv
19
20
21
25
26
26
The Office of the Auditor General has conducted a performance audit and sunset
review of the Arizona Department of Housing (Department) pursuant to a November
3, 2009, resolution of the Joint Legislative Audit Committee. The audit was conducted
as part of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.)
§41-2951 et seq. In addition to assessing the Department’s operations using the
sunset factors specified in statute, this audit focuses on four of the Department’s
largest programs and examines (1) the accomplishments these programs have
achieved and (2) the effectiveness of the Department’s oversight of these programs.
Department mission and purpose
The Department was established in 2002 to help address an anticipated housing
affordability crisis brought on by a widening gap between income and housing
costs.1 The Department’s mission is to provide housing and community revitalization
to benefit the people of Arizona. According to the Department, as of 2003, over 10
percent of Arizona families were not in affordable housing, defined as housing that
costs no more than 30 percent of the adjusted household income. In 2008,
according to U.S. Census Bureau American Community Survey data, approximately
half of renter-occupied units and approximately 40 percent of homes with mortgages
did not meet the standard for affordability.2
In the past several years, housing issues have become prominent concerns because
of the housing market meltdown and the related damage to the nation’s economy. In
Arizona, rapid population growth helped fuel Arizona’s affordable housing and
foreclosure crisis to nearly the worst of all the states. Nationally, Congress directed
stimulus monies to Arizona and other states, including housing-related monies
through the Housing and Economic Recovery Act of 2008 (HERA) and the American
Recovery and Reinvestment Act of 2009 (ARRA). Some of this stimulus money
passes through the Department.
1 Prior to its establishment, the Department’s functions were performed by the Department of Commerce. In 2001 the
Legislature enacted Laws 2001, Ch. 22, §§12 and 14, which transferred the housing programs within the Department of
Commerce first to the Governor’s Office of Housing Development beginning January 1, 2002, and ultimately to the new
Arizona Department of Housing on October 1, 2002. The same bill that established the Department established the
Arizona Housing Finance Authority (Authority). The Authority was established to issue bonds or certificates or provide
financial assistance for housing purposes and to temporarily acquire title to real property. Although the Authority is staffed
by the Department, it is a separate entity from the Department and is not subject to sunset review. However, some of the
Department’s programs are administered jointly with the Authority.
2 U.S. Census Bureau. Arizona: Selected Housing Characteristics: 2006-2008. Data Set: 2006-2008 American Community
Survey 3-Year Estimates.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
The Department provides monies, technical assistance, and compliance oversight to
local governments, public housing authorities, nonprofit and for-profit housing
developers, tribal entities, social service agencies, and qualifying individuals using a
combination of federal and state monies. The monies are provided for such things
as increasing the supply of affordable rental housing, assisting communities with
area revitalization, and providing home purchase assistance. In addition, monies are
used to provide housing and related services for individuals with special needs.
Department responsibilities and programs
The Department generally does not provide direct services but instead acts as a
“pass-through” agency by administering and overseeing programs and services,
several of which are targeted to the State’s rural areas. These programs provide
federal and state monies to local governments, housing developers, and nonprofit
agencies in four areas, described below and shown in Figure 1 (see page 3). Figure
1 also shows the Department’s various programs in each of the four areas.
Department personnel also provide technical assistance to communities and serve
on a state-wide commission that addresses affordable housing needs. Additionally,
according to the Department, staff have been involved in the Arizona Foreclosure
Prevention Task Force to help coordinate outreach and service efforts for the National
Mortgage Foreclosure Counseling program.
Rental housing development and rental assistance—The Department
administers two programs targeted to increasing the supply of affordable rental
housing or helping low-income, elderly, and special needs renters. Specifically:
 Low-Income Housing Tax Credit program (tax credit program)—This U.S.
Internal Revenue Service program awards federal tax credits to housing
developers.1 In exchange for these credits, developers agree to hold a portion
of their rental units for low-income households and charge affordable rents to
qualified tenants in those units. The Department administers and allocates
Arizona’s portion of the program state-wide. Since 2003, the Department has
awarded nearly $82 million in tax credits and helped develop 6,864 low-income
housing units. In 2009, the program awarded over $9 million in tax
credits to develop low-income housing. The Department also administers the
Tax Credit Assistance Program (TCAP) of the ARRA, which provides gap
finance loans to help housing developers cover additional construction costs
associated with projects in Arizona that have already received an allocation of
credits in 2007, 2008, and 2009.
The Department
administers state and
federal monies for a
variety of programs.
1 Tax credits can be used to reduce federal tax liability for a period of 10 years.
State of Arizona
page 2
 Public Housing Authority—The Public Housing Authority operates two federal
Section 8 programs.1 First, Project-Based Contract Administration provides
oversight and monitoring responsibilities for approximately 110 subsidized
properties, representing over 7,900 housing units throughout Arizona.
Second, the Public Housing Authority administers the U.S. Department of
Housing and Urban Development’s (HUD) Section 8 Housing Choice Voucher
Program in Yavapai County because the County is not served by a local public
1 The U.S. Housing Act of 1937, Section 8, authorizes rental voucher and existing housing programs intended to help low-income
households choose and rent safe, decent, and affordable housing. Regulations are found in 24 C.F.R., Part 982,
and the programs are administered by HUD’s Office of Public and Indian Housing.
Office of the Auditor General
page 3
Housing Development and Assistance
Community
Revitalization
Rental Development and
Assistance
Owner-Occupied Housing Homeless and Special
Needs Housing
Tax Credit Administration
Low Income Housing Tax
Credits
(IRS tax credits)
Section 1602 Tax Credit
Exchange
(2009 federal stimulus
monies)1
Gap Finance Loans
Rental Development Gap
Loans
(Housing Trust Fund,
HOME monies)
Tax Credit Assistance
Program
(2009 federal stimulus
monies)
Public Housing Authority
Project-Based Contract
Administration
(HUD monies)
Section 8 Housing
Choice Voucher Program-
Yavapai County
(HUD monies )
Home Purchase
Assistance
Homes for Arizonans2
(Housing Trust Fund)
Your Way Home
(2008 federal stimulus
monies)
Housing Development
and Rehabilitation
Homeownership Unit
Development
(Housing Trust Fund,
HOME monies)
Owner-Occupied
Rehabilitation
(Housing Trust Fund,
HOME, and other HUD
monies)
Emergency Housing
Eviction Prevention and
Emergency Housing
(Housing Trust Fund)
Homelessness Prevention
and Rapid Re-Housing
(2009 federal stimulus
monies)
Special Needs Housing
Housing Opportunities for
Persons with AIDS
(HUD monies)
Shelter Plus Care
(HUD monies)
Supportive Housing
Program
(HUD monies)
Regional and Special
Grants,
Community
Development Block
Grant
(HUD monies)
Community
Development Block
Grant -Recovery
(2009 federal stimulus
monies)
Figure 1: Department of Housing Activities, Programs, and Resources
As of March 31, 2010
Source: Auditor General staff analysis of department-provided information, including its fiscal year 2003 through 2009
annual reports, the FY2005-2009 State of Arizona Consolidated Plan, the Department’s HERA and ARRA
action plans, and other department-provided information on programs, activities, and resources.
1 Federal stimulus resources refer to resources that became available as a result of the HERA and the ARRA.
2 The Department suspended Homes for Arizonans in July 2009 because of instability with its sole funding source,
the State Housing Trust Fund.
housing authority. The voucher program helps very low-income households
limit housing and utilities expenses to 30 percent of their household’s income.
In 2009, over 8,000 households received over $43 million of Section 8
assistance through the Public Housing Authority programs.
Community revitalization—The Department administers a federal program to
revitalize small towns and communities throughout rural Arizona. This program is
called the Community Development Block Grant (CDBG) program. It provides
federal monies for a wide variety of qualified local housing and community
revitalization projects. Distribution criteria requires that projects meet one of three
national program objectives: benefiting people with low and moderate income,
alleviating slum or blight conditions, or addressing urgent community
development needs.
The CDBG program administered by the Department focuses on rural areas. While
most major Arizona cities and counties receive CDBG monies directly from HUD,
the Department contracts with four regional councils of government to help rural
communities prioritize and coordinate local CDBG developments. In fiscal year
2009, according to the Department’s Annual Report, the Department administered
over $11 million in CDBG funding to community projects and individual
homeowners throughout the State. Eighty-five percent of these monies were
distributed regionally by the councils of government, while the remaining 15
percent were allocated for state-wide distribution through competitive bids.
Home ownership assistance—The Department administers federal and state
monies for home purchase assistance, home ownership education and
counseling, and rehabilitation of owner-occupied homes. Specifically the home
purchase assistance programs are:
 Your Way Home—Using federal stimulus monies, the Department
implemented a state-wide home purchase program called Your Way Home.
The program helps qualified homebuyers purchase eligible foreclosed
homes. Participants’ gross income must be no greater than 120 percent of the
area’s median income for the county where the foreclosed property is located.
As of March 12, 2010, the program had facilitated the purchase of 462 homes
with nearly $13.7 million expended.
 Homes for Arizonans—From June 1998 until July 2009, the Department
offered this first-time homebuyer program for Arizona’s rural areas. The
program was supported jointly by the State Housing Trust Fund and the
Arizona Housing Finance Authority (see page 1 for more information on the
Housing Finance Authority and page 9 for information on the State Housing
Trust Fund). The Department distributed $2.7 million to homebuyers through
Homes for Arizonans between January and mid-July of 2009, assisting 226
households. According to the Department, the program was suspended in
The Department’s
community revitalization
program targets rural areas.
State of Arizona
page 4
July 2009 to make way for the Your Way Home program and because of the
uncertainty of continued funding for the program.
Special needs—Finally, the Department administers federal and state monies to
provide housing services to targeted populations, such as people with HIV/AIDS,
or people facing homelessness or needing emergency assistance. Specifically:
 Housing Opportunities for Persons with AIDS (HOPWA)—This program
provides monies to nonprofit organizations to assist in providing housing or
related services to individuals with HlV/AIDS. Money is passed through to local
governments or nonprofit organizations that provide direct assistance to
eligible participants. The Department provides administrative oversight for
HOPWA programs and reported that in fiscal year 2009, the HUD program
monies for HOPWA totaled $185,270.
 Homeless programs—These programs competitively award monies to local
governments or nonprofit agencies that offer programs to address
homelessness problems that may go beyond basic housing concerns. This
category addresses needs of populations experiencing serious mental illness,
domestic violence, substance abuse, and other issues.
The Department administers three such homelessness programs. First, under
a federally funded rural Continuum of Care process, the Department issues
grants for Shelter Plus Care, which provides rental assistance for homeless
persons with disabilities, such as serious mental illness, and Supportive
Housing Program monies, which are used for housing and services that assist
people in the transition from homelessness, as well as services that enable
homeless persons to live as independently as possible. The services include
such things as child-care, employment assistance, health services, and case
management. The Shelter Plus Care program provided $7 million of
assistance in fiscal year 2009 and the Supportive Housing Program provided
$2.3 million of assistance in fiscal year 2009. Second, the Department
administers Eviction Prevention/Emergency Housing grants. Under this
program, which, according to the Department, will be discontinued in June
2010, State Housing Trust Fund monies are available for rental security
deposits, utility payments, and mortgage payment assistance to deter
homelessness. In fiscal year 2009, more than $3.7 million was committed to
the Eviction Prevention/Emergency Housing program. Third, the Department
administers the Homeless Prevention/Rapid Re-Housing program (HPRP),
which uses federal stimulus monies to assist low-income families to retain or
secure housing by providing services such as rental and housing relocation
assistance and utility payment assistance. The Department was awarded
more than $7 million in federal stimulus monies for this program.
The Department
administers several
programs aimed at
assisting the homeless.
Office of the Auditor General
page 5
Organization and staffing
The Department of Housing has a governor-appointed director and two major
divisions: Programs and Operations. The Department had a total of 56 full-time
equivalent positions (FTEs) for fiscal year 2010, including 2 in the Director’s office,
and 0 vacancies as of May 5, 2010. In addition, the Department has established 3
new positions for a new federal program that will start in the summer of 2010.1
According to the Department, only 11 positions are state-appropriated with State
Housing Trust Fund monies. The remaining positions are supported with monies
from federal resources that are allowed to be set aside for program administration,
program fees such as tax credit program application fees, and other non-State
General Fund resources.
The Programs Division (27 FTE) oversees programs the Department administers and
is organized into four areas. Specifically:
 Community Development and Revitalization oversees the Department’s
administration of the CDBG program, and accepts and reviews home
ownership applications for State Housing Trust Fund and federal HOME
Investment Partnerships Program (HOME) monies.2 The unit is also responsible
for overseeing the Department’s home purchase assistance programs such as
Homes for Arizonans and Your Way Home.
 Rental Programs staff administer the tax credit program and review applications
for gap finance loans for projects that have already received tax credits, but
require additional funding (see page 10 for more information on the federal
stimulus monies).
 Risk Assessment officers provide underwriting and risk analysis assessments
on proposed rental development program projects. The risk assessment staff
also review some types of housing bonds issued by the Arizona Housing
Finance Authority for affordable and special needs housing (see page 1 for
information about the Arizona Housing Finance Authority).
 Special Needs administers the Department’s programs that assist people with
HIV/AIDS, serious mental illness, or chronic substance abuse, and persons and
families who are homeless or victims of domestic violence.
The majority of
department staff are
supported with federal
monies.
1 In February 2010, the Obama Administration announced its intent to award more that $1.5 billion to the five states hardest
hit by the foreclosure crisis. The Department anticipates receiving $125.1 million of these monies, which are authorized
by the federal Emergency Economic Stabilization Act of 2008.
2 Federal HOME monies are monies allocated to the Department for both home ownership and rental housing projects.The
Rental Programs area reviews applications for rental housing projects and administers rental project monies.
State of Arizona
page 6
The Operations Division (26 FTE) is responsible for finance and accounting, human
resources, information technology, and legal services, and houses the Department’s
Public Housing Authority functions. The Division also has specific program
responsibilities in the following area:
 Housing compliance officers monitor the long-term compliance of rental
development program properties that benefited from the tax credit program as
well as federal HOME monies. See Finding 2, pages 31 through 42, for more
information on compliance activities.
The Department also provides staff support to the Arizona Housing Commission, an
advisory body to the Department, and the Arizona Housing Finance Authority, a
separate entity with its own housing assistance programs. Specifically:
 The Arizona Housing Commission comprises 24 members from private
industry; community-based nonprofit housing organizations; and state, local,
and tribal governments, with staff support provided by the Department. The
Commission, established by Laws 2001, Ch. 22, §14, is an advisory body to the
Department. Some of its statutory duties are to recommend housing strategic
planning and policy; coordinate public and private housing finance programs;
provide recommendations for better private and public partnerships and
initiatives to develop housing; review state housing programs; encourage the
development of special needs housing; and advise the Governor, Legislature,
and state and local government agencies on public and private actions that
affect the cost or supply of housing.
 The Arizona Housing Finance Authority (1 FTE) consists of seven governor-appointed
board members. One full-time department employee provides staff
support. The Department and the Authority also have an interagency service
agreement in which the Department provides administrative, operating, and
programmatic support to the Authority. The Authority, created in 2002, can issue
Multi-Family Revenue Bonds for rental projects, low-interest Single-Family
Mortgage Revenue Bonds for first-time homebuyers’ primary financing, and
Mortgage Credit Certificates to help provide additional income for first-time
homebuyers through tax credits.
Funding sources and financial operations
The Department receives monies from a variety of federal and state sources, but
none from the State General Fund. In fiscal year 2009, its revenues totaled more than
$110 million, as shown in Table 1 (see page 8).1
1 This does not include the value of the Low-Income Housing Tax Credits received from the U.S. Internal Revenue Service.
According to the Department’s fiscal year 2009 annual report, it received and allocated more than $118.5 million worth
of tax credits. The Department reports tax credit figures at the projected 10-year value of the credits at current market
prices.
Office of the Auditor General
page 7
The Department’s
activities are funded with
a combination of state
and federal monies.
State of Arizona
page 8
2008 2009 2010
(Actual) (Actual) (Estimate)
Revenues:
Intergovernmental $ 68,040,133 $ 77,445,907 $ 123,241,500
Unclaimed property proceeds 2 33,684,313 28,554,061 10,500,000
Charges for services 3,461,899 1,603,094 2,843,400
Interest and other investment income 2,703,240 932,073 707,000
Loan and other income 1,201,437 659,039 300,000
Other 34,400
Total revenues 109,125,422 109,194,174 137,591,900
Expenditures and transfers:
Personal services and related benefits 4,565,920 4,269,446 4,302,800
Professional and outside services 537,702 700,026 443,900
Travel 105,310 99,911 114,500
Food 24,138 84,647 90,000
Aid to organizations and individuals 87,302,569 97,180,758 135,502,700
Other operating 923,380 829,907 846,200
Equipment 75,629 25,965 107,000
Total expenditures 93,534,648 103,190,660 141,407,100
Transfers to the Housing Finance Authority 3 4,000,000 1,500,000
Transfers to the State General Fund 4 13,437,000 32,948,600 13,565,400
Transfers to other state agencies 5 2,032,262 3,775,738 2,025,000
Total expenditures and transfers 113,003,910 141,414,998 156,997,500
Net change in fund balance (3,878,488) ( 32,220,824) ( 19,405,600)
Fund balance, beginning of year 73,734,727 69,856,239 37,635,415
Fund balance, end of year 6 $ 69,856,239 $ 37,635,415 $ 18,229,815
Table 1: Schedule of Revenues, Expenditures, and Changes in Fund Balance 1
Fiscal Years 2008 through 2010
(Unaudited)
1 Excludes the Arizona Housing Finance Authority because it is a separate entity and is not subject to sunset review.
2 In accordance with A.R.S. §44-313, the Department’s State Housing Trust Fund received 35 percent of the proceeds from the
sale or conversion of unclaimed properties in the State during fiscal years 2008 and 2009. Laws 2009, 4th S.S., Ch. 3, §12,
changed the allocation to $10.5 million beginning in fiscal year 2010.
3 The Department transferred $4 million to the Arizona Housing Finance Authority during fiscal years 2008 and 2009 as part of its
intergovernmental agreement with the Authority. During fiscal year 2009, the Department transferred back from the Authority
$2.5 million; therefore, the net transfers to the Authority for fiscal year 2009 were $1.5 million.
4 Consists of transfers to the State General Fund in accordance with Laws 2008, Ch. 53, §§2 and 23, and Ch. 285, §§24 and 46;
Laws 2009, Ch. 11, §110, and Ch. 12, §144, 1st S.S., Ch. 1, §§4 and 5, and 5th S.S., Ch. 1, §2; and Laws 2010, 7th S.S., Ch.
1, §113.
5 Includes $2 million each year transferred to the Department of Health Services for the development of housing for the seriously
mental ill. In addition, fiscal year 2009 includes $1 million transferred to the Department of Economic Security to provide
housingservices to homeless youth and $750,000 to the Department of Veterans’ Services to create and expand the availability
of safe,decent, and affordable housing for veterans experiencing homelessness.
Source: Auditor General staff analysis of the Arizona Financial Information System (AFIS) Accounting Event Transaction File for
fiscal years 2008 and 2009; the AFIS Management Information System Status of General Ledger-Trial Balance screen for
fiscal years 2008 and 2009; and department-provided estimates for fiscal year 2010 as of April 9, 2010.
1 This change was part of the Revenue Budget Reconciliation enacted in Laws 2009, 4th S.S., Ch. 3, §12, which the
Governor approved on November 23, 2009, and effective retroactively to June 30, 2009. A.R.S. §44-313 as amended
does not designate any of these monies to rural areas or areas with state prison facilities.
2 Gap financing loans are used to fill the gap left by traditional financing methods.
3 These transfers were required by Laws 2008, Ch. 53 and 285; Laws 2009, Ch. 12; Laws 2009, 1st S.S., Ch. 1 and 5th
S.S., Ch. 1; and Laws 2010, 7th S.S., Ch. 1. In addition, Laws 2010, 7th S.S., Ch. 1, requires $4.5 million to be transferred
from the State Housing Trust Fund to the State General Fund in fiscal year 2011.
Office of the Auditor General
page 9
Key categories of funding include:
 Federal agency programs—In fiscal year 2009, more than $77 million of the
total was received from other government agencies, including HUD. For several
HUD-funded programs, the amount of funds made available through the
Department is determined using a formula-based system (see Table 6 in
Appendix B, pg. b-i).
 State Housing Trust Fund—This fund administered by the Department receives
proceeds from the State’s unclaimed property and investment earnings. The
Department received more than $28 million in fiscal year 2009 in accordance
with A.R.S. §44-313, which required the Department of Revenue to deposit 55
percent of unclaimed property proceeds into the State Housing Trust Fund,
including 20 percent for use in rural areas and areas with state prison facilities.
However, the Legislature amended A.R.S. §44-313 beginning in fiscal year
2010, changing the State Housing Trust Fund allocation to a fixed amount of
$10.5 million annually.1
State Housing Trust Fund monies are used to support all the Department’s
programs. For example, they have been used for rental development gap
financing loans and for emergency assistance to individuals.2 In fiscal years
2008, 2009, and 2010, the Legislature transferred $10.2 million, $25.8 million,
and $7 million, respectively, from the State Housing Trust Fund to the State
General Fund.3 In addition, in fiscal year 2008, the Legislature transferred the
remaining balance of $364,000 in the Housing Development Fund, which had
been established to implement a program in areas with state prison facilities,
to the State General Fund.
 Housing Program Fund—This fund, also administered by the Department, is
authorized to receive monies from a variety of fees, investment earnings, and
other sources. The fees include fees for reviewing applications for the tax credit
program and monitoring long-term compliance with the program; fees for
reviewing industrial development authorities’ applications to issue bonds to
finance certain types of facilities, including rental projects and some medical
facilities; and fees or cost reimbursements for any of its programs or duties. In
fiscal year 2010, the Department estimated it would collect $5.3 million in fees.
Housing Program Fund monies can be used to pay the costs of administering
State of Arizona
page 10
any department program. In fiscal years 2008, 2009, and 2010, the Legislature
transferred $2.8 million, $3.5 million, and $6.6 million, respectively, from the
Housing Program Fund to the State General Fund.1
 Federal stimulus monies—Starting in 2008, the Department has received
additional monies through federal stimulus programs that HUD and the U.S.
Department of the Treasury fund. First, the HERA, which created the federal
Neighborhood Stabilization Program, provided Arizona with a total of $121.1
million, of which $38 million was provided to the Department for use in housing
programs state-wide. The remaining monies were provided directly to cities
within Maricopa and Pima Counties (see Table 2, page 11). These monies were
targeted to areas with high foreclosure rates and were limited to five eligible uses
(see textbox). The Department is using $26 million to fund the Your Way Home
program, which assists individuals in purchasing foreclosed homes, $9.6 million
for redeveloping foreclosed, vacant or blighted multi-family properties, and $2.7
million for planning and administration. Second, the 2009 ARRA authorized
Arizona jurisdictions a total of $153.3 million of additional monies for HUD
programs, including the CDBG, homelessness prevention programs, and gap
finance loans. The ARRA also authorized states to exchange a portion of their
credit program ceiling for cash grants to make awards for building or
rehabilitating low-income housing. The Department was awarded $42.5 million
for the HUD programs and $37.6 million from the U.S. Treasury for the tax credit
exchange program.2 Finally, according to the Department, it will receive $125.1
million from the Emergency Economic Stabilization Act of 2008 (EESA)
beginning in the summer of 2010.
1 These transfers were required by Laws 2008, Ch. 53 and 285; Laws 2009, Ch. 11; Laws 2009, 1st S.S., Ch. 1 and 5th
S.S., Ch. 1; and Laws 2010, 7th S.S., Ch. 1. In addition, Laws 2010, 7th S.S., Ch. 1, requires $1.4 million to be transferred
from the Housing Program Fund to the State General Fund in fiscal year 2011.
2 The ARRA also authorized additional monies for the federal Neighborhood Stabilization Program for allocation on a
competitive basis, but the Department did not apply for this funding. According to the Department, these monies were
intended for local jurisdictions.
Eligible Uses for 2008 HERA
 Establish financing mechanisms for the purchase and redevelopment of
foreclosed homes and residential properties
 Purchase and rehabilitate abandoned or foreclosed homes and residential
properties so that they may be sold, rented, or redeveloped
 Establish land banks for foreclosed homes
 Demolish blighted structures
 Redevelop demolished or vacant properties
Source: Auditor General staff analysis of HUD’s notice of allocation for the HERA. Federal Register. (2008, October).
Notice of allocations, application procedures, regulatory waivers granted to and alternative requirements for
emergency assistance for redevelopment of abandoned and foreclosed homes grantees under the Housing
and Economic Recovery Act, 2008, 73 (194), 58330-58349.
Office of the Auditor General
page 11
In response to fiscal year 2009 fund balance transfers, according to department
officials, they reduced spending by reducing the Department’s workforce by 18
percent, or 13 positions, and eliminating a division, the Center for Housing
Affordability and Livable Communities (Center). The Center was established to
provide access to research and the best practices in housing innovation, training,
and guidance at the local level and worked to improve Arizona’s participation of
nonprofit or community-based organizations in community development and
affordable housing.
Audit scope and objectives
This performance audit and sunset review focused on four of the Department’s
programs: the tax credit program, the CDBG program, and two home purchase
assistance programs—Your Way Home and Homes for Arizonans. The audit focused
on these programs because they serve a large number of citizens and receive a
significant amount of federal and state resources. These programs also represent the
variety and diversity of programs administered by the Department. With regard to
these four programs, the audit focused on two main objectives: (1) analyzing these
Jurisdiction Amount Funded
State of Arizona $ 38,370,206
Phoenix 39,478,06
Maricopa County 9,974,267
Mesa 9,659,665
Tucson 7,286,911
Glendale 6,184,112
Pima County 3,086,867
Avondale 2,466,039
Chandler 2,415,100
Surprise 2,197,786
Total Arizona $121,119,049
Source: Auditor General staff analysis of HUD’s notice of allocations for the
HERA. Federal Register. (2008, October 6). Notice of allocations,
application procedures, regulatory waivers granted to and alternative
requirements for emergency essistance for redevelopment of abandoned
and foreclosed homes grantees under the Housing and Economic
Recovery Act, 2008, 73 (194), 58330-58349.
Table 2: Housing and Economic Recovery Act of 2008
Neighborhood Stabilization Funding by Jurisdiction
Fiscal Year 2008
(Unaudited)
programs’ accomplishments in providing housing and community revitalization and
(2) analyzing the effectiveness of the Department’s oversight of these programs. In
addition, the report includes responses to the 12 sunset factors specified in A.R.S.
§41-2954.
The audit was conducted in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for our findings
and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
The Auditor General and staff express appreciation to the Department’s director and
staff for their cooperation and assistance throughout the audit.
State of Arizona
page 12
Department programs increase housing
opportunities and enhance communities
The Arizona Department of Housing’s (Department) programs have facilitated
increased affordable housing opportunities and improved community services
across the State. Auditors found evidence of these accomplishments across all four
of the programs reviewed in detail. More specifically:
 The Low-Income Housing Tax Credit program (tax credit program) has provided
thousands of additional housing units targeted at low-income populations.
 The Community Development Block Grant (CDBG) program administered by
the Department has addressed and met community needs in rural areas.
 The Department’s home purchase assistance programs—Homes for Arizonans
and Your Way Home—have aided more than 2,700 Arizona households in
achieving home ownership.
Auditors focused on these four programs because they serve a large number of
citizens and receive a significant amount of federal and state resources, and they
represent the variety and diversity of programs administered by the Department. See
Finding 2 (pages 31 through 42) for an assessment of the Department’s award
process and monitoring practices for these programs.
Tax credit program provides affordable housing
opportunities across the State
The tax credit program has created additional affordable housing opportunities for
Arizonans. The program uses federal tax credits to help finance low-income housing
for families, the elderly, and special needs populations (see textbox, page 14).
Since its creation in 1986, the tax credit program has facilitated the construction of
362 properties that provided more than 23,000 affordable housing units in Arizona.
Office of the Auditor General
page 13
FINDING 1
Auditors’ case studies focused on three tax credit program properties in different
geographic areas and found that the developments addressed both community and
individual needs.
Finding affordable housing opportunities is a challenge facing many Arizonans.
According to its 2006 through 2008 American Community Survey data, the U.S.
Census Bureau estimates that 328,370 of the renter-occupied units in Arizona, or
approximately half, were not considered affordable based on the income level of their
occupants.1 According to the U.S. Department of Housing and Urban Development
(HUD), affordable housing is defined as housing that costs less than 30 percent of
the household’s annual income.
Tax credit program uses federal tax credits to build affordable
housing—The tax credit program is a federal program administered at the state
level by the Department and is designed to make monies available to develop
rental housing for low-income households, which can include the elderly, veterans,
and other special needs populations.2 The annual amount of tax credits available
for the Department to distribute is determined by a population-driven formula
found in the federal Internal Revenue Code. Project developers that receive a tax
credit award from the Department sell the credits to private investors and use the
proceeds, which can be supplemented by other monies such as State Housing
Trust Fund loans, to build rental properties (see Introduction and Background,
1 U.S. Census Bureau. Arizona: Selected Housing Characteristics: 2006-2008. Data Set: 2006-2008 American Community
Survey 3-Year Estimates.
2 For the tax credit program, low-income households are those whose income is 60 percent or less of the area median
income.
State of Arizona
page 14
Low-Income Housing Tax Credit program
 The program was established in 1986 and provides the single largest
subsidy for low-income rental housing through the Federal Internal
Revenue Code.
 Under the program, states are authorized to issue federal tax credits for
the acquisition, rehabilitation, or new construction of affordable rental
housing.
 The program provides incentives to develop and invest in low-income
rental housing because developers can sell the credits to private
investors and use the proceeds to help cover acquisition, construction,
and other development costs, or developers can use the tax credits to
offset taxes on other income.
 Program developments are required to charge affordable rent for
qualified low-income tenants, which may include families, senior citizens,
and special needs populations.
Source: Auditor General staff analysis of Internal Revenue Code (26 U.S.C. §42); Schwartz, A.F.
(Ed.).(2006). Housing policy in the United States: An introduction. New York: Routledge; and the
Department’s 2009 Qualified Allocation Plan.
pages 1 through 12, for information on the State Housing Trust Fund). In return,
they must reserve some of their units as low-income units for at least 30 years and
charge affordable rent to qualified tenants in those units.1 “Affordable” means that
the rent is no more than 30 percent of the income limitation for the unit, which is
based on the median income for the area. For example, as of March 2009, 50
percent of the area median income in Maricopa County for a one-person
household is $23,050, meaning the rent charged to this person could not exceed
$576 for a studio unit.2 See Finding 2 (pages 31 through 42) for information on how
the Department monitors the tax credit program.
The Department relies on the State’s Qualified Allocation Plan to determine how it
allocates tax credits. The plan establishes goals and guidance for the tax credit
program in Arizona. The Internal Revenue Code requires allocating agencies like
the Department to use such a plan in allocating the federal tax credits, and the
Department develops a new plan annually. In an effort to assess and address the
affordable housing needs across the State, the Department seeks public input on
the plan from nonprofit groups, advocacy groups, cities, developers, and others
(see Sunset Factor 2, pages 43 through 45) and incorporates the feedback in
developing the plan. The 2009 plan sets out 19 goals for the tax credit program,
such as maximizing the number of affordable units added and administering the
program in a way that encourages timely project completion and occupancy.
The Department distributes tax credits throughout Arizona and ensures that all
available tax credits are used. One of the Department’s goals is to provide an
equitable distribution of tax credits across the State. As seen in Figures 2, 3, and
4 (see pages 16, 17, and 18 respectively), the Department has awarded tax credits
to projects located in 14 of Arizona’s 15 counties, with the majority of tax credit
program projects (66 percent) located outside of Maricopa and Pima Counties.3 In
addition, the Department has set an annual goal of allocating all of the available
federal tax credits. If tax credits assigned in a particular year are not allocated to a
tax credit program project within 2 years, the credits are forfeited by the State and
go into a national pool for reassignment to eligible states. Tax documents
submitted to the U.S. Internal Revenue Service (IRS) by the Department indicate
that the Department has allocated all of its available tax credits within the 2-year
time frame and has never returned credits.4
The Department
establishes state goals
for the tax credit
program.
1 Under the Internal Revenue Code 26 U.S.C. §42(g), the developer must either set aside 20 percent of the project’s units
for people below 50 percent of the area’s median income or set aside 40 percent of the units for people below 60 percent
of the area’s median income. In addition to the rent restriction, the units must be occupied by individuals whose income
is below the 50 or 60 percent limit.
2 Area median income varies according to the number of persons in the unit, and allowable rents charged vary according
to the number of bedrooms in the unit.
3 According to department data, Greenlee County has no tax credit program projects.
4 The Department had a carryover of $739,352 in credits in 2009 that can be awarded in 2010.
Office of the Auditor General
page 15
State of Arizona
page 16
Figure 2: Locations of Tax Credit Program Developments State-wide
Calendar Years 2003 through 2009
(Unaudited)
Source: Auditor General staff analysis of department data on tax credit program projects.
Mohave Coconino
Yavapai
Maricopa
Yuma
La Paz
Navajo
Apache
Gila
Graham
Greenlee
Pinal
Pima
Cochise
Santa Cruz
Mohave Coconino
Yavapai
Maricopa
Yuma
La Paz
Navajo
Apache
Gila
Graham
Greenlee
Pinal
Pima
Cochise
Santa Cruz
Tax credit program has increased affordable rental housing—
According to housing literature, the federal tax credit program is the largest and is
widely regarded as the most successful program for building affordable housing
opportunities in the nation.1 Since the federal tax credit program’s creation in 1986,
the State has awarded approximately $164 million in federal tax credits to facilitate
the construction of 362 tax credit program projects in Arizona, providing for more
than 23,000 affordable housing units.2 It is by far the Department’s largest
affordable housing program; by comparison, the Section 8 project-based program
provided fewer than 8,000 units of affordable housing state-wide as of June 2009
(see Introduction and Background, pages 1 through 12, for information on the
Section 8 project-based program). Since its inception as a stand-alone agency, the
Department has awarded tax credits to 117 projects, including 10 that were
awarded tax credits in 2009. The anticipated average total cost for the 2009
projects is $11.5 million, with an average of nearly $950,000 in credits allocated to
each project.
Office of the Auditor General
page 17
Figure 3: Locations of Tax Credit Program Developments in Phoenix Metro Area
Calendar Years 2003 through 2009
(Unaudited)
Bell Rd
Shea Blvd
Camelback Rd
Source: Auditor General staff analysis of department data on tax credit program projects.
1 Schwartz, A.F. (Ed.). (2006). Housing policy in the United States: An introduction. New York: Routledge; Joint Center for
Housing Studies of Harvard University (2009). The disruption of the low income housing tax credit program: Causes,
consequences, responses, and proposed correctives. Retrieved May 3, 2010, from
http://www.jchs.harvard.edu/publications/governmentprograms/disruption_of_the_lihtc_program_2009.pdf
2 Until the Department of Housing was created as a stand-alone agency in October 2002, the Department of Commerce
awarded the tax credits.
Tax credit program properties address community needs—Low
vacancy rates indicate that tax credit program properties are meeting the demand
for affordable housing. The vacancy rate for tax credit properties located outside
of Maricopa and Pima Counties was 6.9 percent as of December 31, 2008.1,2 By
comparison, the U.S. Census Bureau estimated Arizona’s overall rental vacancy
rate from 2006 through 2008 was 9.7 percent. HUD reported that tax credit
program properties had considerably lower vacancy rates than the nation’s overall
rental market in 2005 through 2009 based on a survey of eight investors’
portfolios.3
State of Arizona
page 18
Grant Rd
Broadway Blvd
Valencia Rd
Kolb Rd
Grant Rd
Broadway Blvd
Kolb Rd
Valencia Rd
Figure 4: Locations of Tax Credit Program Developments in Tucson Metro Area
Calendar Years 2003 through 2009
(Unaudited)
Source: Auditor General staff analysis of department data on tax credit program projects.
1 The 2008 vacancy data was the most recent available as of January 2010. There were 206 vacancies in 56 reporting rural
properties out of a total of 3,007 units. The vacancy rate for urban tax credit properties was not readily available.
2 According to the Department, tax credit property owners and management companies are primarily responsible for
marketing and advertising their developments.
3 Collinson, R., & Winter, B. (2010). U.S. rental housing characteristics: Supply, vacancy, and affordability [HUD PD&R
Working paper 10-01]. Washington, D.C: U.S. Department of Housing and Urban Development.
Case studies of three projects that received tax credit allocations from 2003 through
2006 illustrate the results of these projects in their communities. Specifically:
 Downtown Phoenix development built to revitalize neighborhood and tackle
blight in the community—Matthew Henson is a large housing development
located in downtown Phoenix, near Grant Street and 7th Avenue, designed to
revitalize and provide additional affordable housing opportunities in the
downtown community (see photo). The development replaced a severely
distressed low-income housing project that was originally constructed in the
1940s. As a mixed-income development, Matthew Henson contains 549
housing units, 445 of which are reserved for low-income households. The
development was financed in four phases and received tax credit awards each
year from 2003 to 2006, totaling nearly $4.3 million in tax credits. The
development’s main funding source was a $35 million HUD HOPE VI grant that
the City of Phoenix received in 2001.1 In addition to providing housing, the
development provides HOPE-VI-sponsored assistance, such as job training,
education, transportation, and daycare services for its residents.
The construction of Matthew Henson
has had a positive impact on the
downtown community. City of Phoenix
officials indicated that one of the major
impacts is that the neighborhood
surrounding Matthew Henson seems
more engaged and interested in
ensuring that the area is clean, safe,
and properly maintained. A project
stakeholder similarly observed that the
streets around Matthew Henson are
cleaner, the whole feel and look of the
neighborhood is improved, and
surrounding neighborhoods were
starting to make improvements as
well. Further, city housing officials
indicated that crime had decreased in
the area and that this drop was
attributed in part to the revitalization brought on by Matthew Henson’s
construction. Finally, the property also helps its low-income tenants pay
affordable rent. Auditors spoke with a resident who said that living in Matthew
Henson has provided her with the independence she desired and the cost-savings
she needed to address other financial obligations. According to
Matthew Henson property management, the tenant paid $875 for a unit that
would have cost $925 at the market rate and until recently would have cost
$1,025.2
1 HOPE VI is a federal program developed to eliminate severely distressed public housing.
2 According to property management, the market rate for this unit was gradually reduced between approximately February
2009 and February 2010.
Office of the Auditor General
page 19
Photo 1: Matthew Henson Development—Phoenix
Source: Courtesy of Matthew Henson Apartments.
 Gilbert project addresses need for senior housing—Page Commons is a 100-
unit independent senior housing apartment complex located in downtown
Gilbert, near Gilbert and Elliott Roads (see photo). The property was awarded
more than $660,000 in tax credits in 2003. According to the developer’s
application, Page Commons represents Gilbert’s first affordable living
community dedicated exclusively to seniors. A third-party market study included
as part of Page Commons’ application for tax credits indicated the need for such
a development. In addition, the application cited 2000 census figures, reporting
that 45 percent of senior renters surrounding the development in Gilbert paid 35
percent or more of their income on rent, compared to the standard HUD
established that households should not devote more than 30 percent of their
income on housing costs. Further, the study found that even if all the affordable
units within Page Commons were occupied, there would be demand for an
additional 1,176 senior units in the market area. According to the property
manager, an affordable development dedicated solely to seniors was very
important for Gilbert because of the area’s growing senior population.
Besides helping to address a growing housing need, Page Commons has
provided revitalization within the Town of Gilbert. The property manager and a
Gilbert official indicated that Page Commons’ construction leveraged efforts to
build a nearby community center, which have concurrently helped to revitalize
the surrounding area, remove blight,
and serve the senior population.
Further, Page Commons’ focus on
serving seniors has significantly
contributed to Gilbert’s multi-generational
emphasis for that part of
town. A Page Commons resident
indicated that living in an affordable
development allows her more financial
independence than she would
otherwise have because of the
reduced rent that she pays. The
resident also indicated that the
surrounding area was improved and
looked nicer because of the Page
Commons’ construction.
State of Arizona
page 20
Source: Arizona Office of the Auditor General.
Photo 2: Page Commons Development—Gilbert
 Rural tax credit development increases affordable housing—Maddox Estates
Townhomes is a 60-unit affordable housing development located in Eloy, a
small rural city in southern Arizona near Interstate 10 and Alsdorf Road (see
photo). Maddox Estates was awarded nearly $675,000 in tax credits in 2003
and is designed to serve families in rural Arizona. According to the application
the developer submitted, prior to the construction of Maddox Estates, no new
multi-family development had been built in Eloy since 1993 and a market
study indicated a strong demand for family housing.
The project has helped address a serious need for affordable housing in Eloy.
A market demand study conducted in conjunction with the planning of the
development indicated that even if every unit in Maddox Estates were to be
occupied, there would still be demand for an additional 322 units in the
market area. The study also indicated that three other tax credit properties in
the area had only one vacant unit between them. Further, a resident of
Maddox Estates told auditors that it was difficult to find other decent
affordable housing in Eloy. In addition, prior to Maddox Estates’ construction,
more than 40 HUD Section 8 vouchers in Eloy went unused because there
was not enough available housing for the vouchers’ recipients.1 According to
an Eloy Public Housing Authority representative, as of February 2010, all 143
of the Section 8 vouchers available were being used, including 19 within the
Maddox Estates development.
Maddox Estates has provided additional affordable housing opportunities
and a nicer living environment for low-income tenants in the area, and a
community block watch has been established to try to address crime in the
area. The property managers and a
community action program manager in Eloy
indicated that Maddox Estates helps to
provide an additional option for affordable
housing in the area and provides amenities
that most other affordable housing
developments in the area cannot match,
such as a pool, a recreation area, and larger
apartments with more rooms that can
accommodate larger families. Also,
because Maddox Estates is one of the
newest developments in the area, the
individual units provide a nicer living
environment as compared to the other older
affordable housing opportunities in the
area. Even so, both property management
and a tenant noted occurrences of crime at
the development. The property manager
1 The Section 8 program provides rent assistance vouchers to very-low-income households to enable them to obtain
decent, safe, and sanitary housing.
Office of the Auditor General
page 21
Photo 3: Maddox Estates Development—Eloy
Source: Arizona Office of the Auditor General.
reported that a community block watch has been established to address the
issue.
CDBG projects meet community needs across the State
The State’s CDBG program helps to address the needs of Arizona’s rural
communities. The program uses federal dollars to fund eligible projects and
programs that serve low- and moderate-income persons. In state fiscal years 2003
through 2009, the program has facilitated the implementation of more than 430
projects and programs serving Arizona’s rural communities. Auditors’ case studies
of three projects found that they helped to serve and address community needs.
Department administers CDBG monies to address rural
communities’ needs—The State CDBG program provides rural
communities with resources to address a wide range of community development
needs, mainly targeted at low- and moderate-income populations. The CDBG
program’s primary statutory objective is to develop communities by providing
decent housing and a suitable living environment, and by expanding economic
opportunities, primarily for persons of low and moderate income. In fact, the State
must ensure that at least 70 percent of its CDBG grant funds are used for activities
that benefit low- and moderate-income persons. The State may also use its funds
to meet urgent community development needs, such as serious health or welfare
threats to the community. The Department is responsible for approving
applications that are eligible and meet national objectives and state priorities (see
Finding 2, pages 31 through 42). In state fiscal years 2003 through 2009, the
Department received approximately $13 million per year, on average, in CDBG
entitlement funds from HUD to fund eligible programs and projects in communities
located in the 13 rural counties in the State. Community projects that receive
CDBG funds vary greatly in scope and cost. For example, in state fiscal year 2009,
a Prescott Valley street improvement project was awarded more than $720,000 in
CDBG funds. In contrast, a Page park improvements project was awarded
$17,000 in that same year. In state fiscal year 2009, 59 projects received CDBG
funds through the Department.
The State CDBG program administered by the Department is available to
approximately 70 eligible units of local government, including cities, towns, and
counties in rural areas located outside of “entitlement” jurisdictions. The
Department’s policy is to allocate 85 percent of CDBG program monies to four
rural regions using a population and poverty-based formula, and the Department
works with the regions’ councils of government to determine how the monies will
be distributed.1 The remaining 15 percent is distributed competitively state-wide to
projects that are ready to implement immediately. Communities designated as
The State’s CDBG
program assists
communities and
individuals in the State’s
rural areas.
1 The four rural regions are (1) Gila and Pinal Counties, covered by the Central Arizona Association of Governments; (2)
Apache, Coconino, Navajo, and Yavapai Counties, covered by the Northern Arizona Council of Governments; (3)
Cochise, Graham, Greenlee, and Santa Cruz Counties, covered by the South Eastern Arizona Government Organization;
and (4) La Paz, Mohave, and Yuma Counties, covered by the Western Arizona Council of Governments.
State of Arizona
page 22
entitlement jurisdictions receive CDBG funds directly from HUD. Entitlement
jurisdictions in Arizona include all of Maricopa and Pima Counties; the cities of
Flagstaff, Prescott, and Yuma; and tribal lands. The Department does not
administer CDBG funds allocated to these areas.
CDBG dollars improve community services and opportunities—The
Department administered more than $83 million in CDBG grant monies on more
than 430 projects and programs in state fiscal years 2003 through 2009. As shown
in Figure 5 (see page 24), these monies have been used for projects and
programs throughout the State’s rural counties. The monies have been used to
assist communities in areas such as infrastructure, community, and individual
needs. See textbox for examples of how the CDBG monies can be used.
CDBG projects address specific community needs—Three case studies
of projects that received CDBG monies from the Department demonstrate the
results these projects have had in their communities. Specifically:
 Water system improvements reduce potential dangers in rural community—In
state fiscal year 2005, the Department awarded the City of Eloy more than
$340,000 in CDBG monies to engineer and install approximately 6,600 feet of
piping to connect the water distribution system in Eloy proper to the water
distribution system in one of its outlying areas called Toltec (see photo on
page 25).
Office of the Auditor General
page 23
CDBG Program
CDBG funds may be used to address a wide variety of community needs, including
construction or renovation of infrastructure projects such as:
water, wastewater, and solid waste facilities;
streets, sidewalks, and street lighting;
parks; and
flood control projects.
The funds may also be used for construction or improvements of community facilities such as:
senior, youth, and community centers; and
health and social services centers.
In addition, the funds may be used to serve individual citizens, such as:
creation or retention of jobs in carrying out an economic development project; and
owner-occupied housing rehabilitation and rental rehabilitation.
Source: Auditor General staff analysis of examples in HUD’s July 2002 guide to national objectives and eligible activities for State
CDBG program and the Department’s January 2009 CDBG application handbook.
State of Arizona
page 24
Figure 5: Number of CDBG Projects and Dollars Awarded
Fiscal Years 2003 through 2009
(In Thousands of Dollars)
(Unaudited)
1 Not applicable because the Department does not administer CDBG monies in Maricopa and Pima Counties.
These counties receive CDBG funding directly from HUD.
Source: Auditor General staff analysis of department CDBG project and award data.
1
1
The new piping has allowed the city to address safety and convenience issues.
Prior to installing the new piping, both water systems were operated as separate
and unconnected pressure zones with a single gas-powered pump to back up
the electric pumps. Therefore, when the system in Eloy went down because of
an electrical outage, citizens in Toltec lost running water, which presented both
cost and safety issues. According to an Eloy official, when the Toltec water
system would go out in the past, city employees would have to purchase bottled
water for distribution to all of the citizens of Toltec. The loss of water was also a
fire hazard because the lack of pressure would disrupt the source of water from
the fire supply line for the fire department. By connecting the water systems, Eloy
has been able to prevent the loss of water and any inconveniences or potential
dangers that come with it. According to a city official, the water system
improvements have worked as designed to prevent any additional instances of
water loss in Toltec. The official estimated that the system has been used three
or four times.
 Food bank provides needed nutritional resources to community—In state fiscal
year 2007, the Department awarded more than $340,000 in CDBG monies to
develop and construct a new building used to house a food bank serving low-income
persons in Tombstone and the surrounding communities (see photo on
page 26). In addition to food, the food bank also distributes clothing, diapers,
soap, shampoo, and medicine, which is all provided free to qualifying low-income
customers. The new food bank serves as a replacement for an older
food bank that was located in a run-down hospital that had become unsuitable
for food storage because of unsanitary conditions and because the number of
persons needing assistance was continuing to grow (see photo on page 26).
Office of the Auditor General
page 25
Photo 4: Section of Piping Connecting Water Systems in Eloy
Source: Arizona Office of the Auditor General.
According to food bank management, with the new building, the food bank has
been able to increase the amount of clients it can serve and meet a growing
needy population in the area. Management said a decline in tourism has meant
that many in Tombstone have lost their jobs or are under-employed.
The new building allows the food bank to
accept more donations and house more products. The
new food bank is required to stay open a minimum of 20
hours per week, which, according to food bank
management, is a substantial increase over the old food
bank’s hours. In addition, because of the new building’s
CDBG-funded construction , the food bank was also able
to obtain additional money from the U.S. Department of
Agriculture to purchase shelving and a refrigeration unit,
which will be used to store fresh produce. The old food
bank in Tombstone was not equipped to store fresh
produce and was not large enough to have a refrigeration
unit. According to food bank management estimates, the
food bank has been able to triple the number of clients it
can serve and meet a growing needy population in the
area.
 Job training program provides career opportunities—In state fiscal year
2006, the Department awarded the City of San Luis more than $22,000 in
CDBG monies to continue a public service construction training program
for youth. According to a program official, the program was initiated in
2003 with a HUD grant, but needed CDBG monies to continue the
program. Following the expenditure of CDBG monies, the program
received additional HUD grants to continue the job training program and
San Luis also agreed to contribute funding to the program from its own
resources. The program was structured to serve about ten
students at a time in an 8-month training cycle divided
equally between the classroom and on the job at
construction sites. The program required participants to
carry out community service projects, such as cleaning
parks and performing rehabilitation work on low-income
homes in the community, as well as participate in
leadership training. According to the application, the
program was designed to address dropout rates, and all
of the program’s participants would be from low-income
households and either dropping out of school or at risk for
dropping out. Program participants receive a High School
Equivalency Diploma (GED) after passing a series of tests
that are administered during the program, and the
program continues to offer GED-related help for 2 years
after program completion for participants who do not pass
the tests.
State of Arizona
page 26
Photo 5: Interior of New Tombstone Food Bank
Source: Courtesy of Community Food Bank.
Source: Courtesy of Community Food Bank.
Photo 6: Interior of Old Tombstone Food Bank
The job-training program has given the youth an opportunity to achieve career
success. Program stakeholders indicated that the program provides a great
opportunity for the students from low-income families to enhance their skills and
gain a marketable education. According to a program supervisor, another
important impact of the program is that it serves to open the students’ minds
and helps them see the great things that they can accomplish. Data provided
by a program official shows that 67 percent of the program’s enrollees have
graduated. In addition, program reports indicate that 1 or 2 years after program
completion, approximately 71 percent of graduates had found work or were
continuing their education. As of February 2010, in addition to the 10 students
who graduated in the CDBG-funded training cycle, 55 students had completed
the program.
Home purchase programs facilitate home ownership
The home purchase assistance programs, administered since the Department’s
inception in 2002, have aided more than 2,900 households in purchasing homes.
The Department’s two programs have helped first-time homebuyers using millions of
state and federal dollars.
Department programs provide home ownership assistance—In
addition to administering programs designed to provide affordable rental housing
opportunities and improve community services and infrastructure, the Department
has also created two programs targeted at assisting households in purchasing a
home. The first program—known as Homes for Arizonans—was started in 1998
and suspended in 2009. It used state monies from the Housing Trust Fund to
provide down payment assistance to first-time homebuyers in rural Arizona. The
second program—known as Your Way Home—was offered to the State’s rural
areas in May 2009 and state-wide beginning in July 2009. The program uses
federal stimulus monies to help individuals purchase foreclosed homes. Table 3
(see page 28) summarizes both programs’ expenditures by county since
inception.
Home purchase programs help Arizonans achieve home
ownership—Both of the Department’s home ownership programs have helped
citizens achieve home ownership. Specifically:
 Homes for Arizonans—The Department and the Arizona Housing Finance
Authority funded the first program, known as Homes for Arizonans, in an effort
to provide first-time homebuyers with down payment and closing cost
assistance in rural Arizona. The level of assistance under this program varied
Office of the Auditor General
page 27
The Department
administers a program
that uses federal
stimulus monies to help
individuals purchase
foreclosed homes.
based on the buyer’s income. Eligibility was based on income—generally
below 80 percent of the area’s median income. Buyers with higher
incomes were required to use the Arizona Housing Finance Authority’s
mortgage products and/or programs (see page 7 for information about
the Arizona Housing Finance Authority). The program was a rural
homebuyer initiative available in all areas of Arizona outside of Maricopa
and Pima Counties and was administered by a network of nonprofit
agencies and department staff. Buyers were required to contribute at least
$1,000 of their own money and participate in pre- and post-purchase
counseling. According to the Department, the program was suspended in
July 2009 to make way for the Your Way Home program (see page 29)
and, because of the uncertainty of its main funding source, the State
Housing Trust Fund (see page 9).
Homes for Arizonans helped many Arizonans become homeowners.
Since the Department’s inception in October 2002, the program provided
nearly $30 million to assist more than 2,500 households (see Table 3).1 The
Department distributed the greatest portion of these funds in Yuma
County, with more than $7.4 million used to assist 650 households.
1 The Homes for Arizonans Initiative originally started in 1998 under the Department of Commerce.
State of Arizona
page 28
County
Homes for Arizonans Your Way Home
Households
Assisted
Dollars
Expended
Average
Assistance
Households
Assisted Dollars Expended
Average
Assistance
Apache 111 $ 915,902 $ 8,251 1 $ 24,266.00 $24,266
Cochise 377 $ 4,106,696 $ 10,893 8 $ 202,917.00 $25,365
Coconino 115 $ 1,551,224 $ 13,489 8 $ 356,698.00
$44,587
Gila 19 $ 248,479 $ 13,078 NA NA NA
Graham 51 $ 673,314 $ 13,202 2 $ 49,940 $24,970
Greenlee 2 $ 27,805 $ 13,902 NA NA NA
La Paz 2 $ 25,803 $ 12,902 NA NA NA
Maricopa NA NA NA 160 $ 4,912,483.00 $30,703
Mohave 103 $ 1,724,080 $ 6,739 25 $ 729,806.26 $29,192
Navajo 250 $ 2,105,007 $ 8,420 12 $ 339,970.00 $28,331
Pima NA NA NA 121 $ 3,737,634.00 $30,890
Pinal 438 $ 5,363,747 $ 12,246 31 $ 702,285.60 $22,654
Santa Cruz 227 $ 3,213,089 $ 14,155 9 $ 222,980.00 $24,776
Yavapai 166 $ 2,274,381 $ 13,701 49 $ 1,530,991.00 $31,245
Yuma 650 $ 7,409,996 $ 11,400 36 $ 861,084.00 $23,919
Total 2511 $ 29,639,525 $11,804 462 $ 13,671,054.86 $29,591
Table 3: Home Purchase Assistance Expenditures by County
October 2, 2002 through July 17, 2009 (Homes for Arizonans)
June 25, 2009 through March 12, 2010 (Your Way Home)
Source: Auditor General staff analysis of Homes for Arizonans and Your Way Home data provided by the
Department.
Since 2002 the
Department has helped
over 2,500 families
purchase homes.
Although some homeowners aided by the program subsequently lost their
homes, the overall foreclosure rate appears to compare favorably with
performance across the broader population. In all, creditors have foreclosed on
106 homes that received assistance since the Department’s inception, which
represents a 4.2 percent foreclosure rate. However, 95 of the foreclosures (90
percent) took place during the turbulent housing years of 2008 and 2009 when
foreclosures across the country skyrocketed. By comparison, 6.17 percent of all
loans in Arizona were in foreclosure as of June 30, 2009.
 Your Way Home—The Department’s second homebuyer assistance program,
Your Way Home, is federally funded through the Neighborhood Stabilization
Program that was established by the federal Housing and Economic Recovery
Act of 2008 (HERA). The Department made this program available state-wide
beginning in July 2009. Through this program, the Department offers 22 percent
of the purchase price in assistance in the form of a deferred second mortgage
to qualified homebuyers to purchase an eligible foreclosed home. To be eligible,
buyers must have income no greater than 120 percent of the area’s median
income and must also complete an 8-hour homebuyer education class. The
Department has allocated $26 million of its HERA monies for this program. This
includes approximately $6 million reallocated from other Housing and Economic
Recovery Act uses. The Department decided to make this reallocation in
December 2009 because of high demand for purchasing foreclosed homes.
As of March 12, 2010, Your Way Home had facilitated 462 home purchases
across the State with nearly $13.7 million of the available $26 million expended
(see Table 3, page 28). The average assistance provided state-wide is
approximately $30,000 per home. The Department has assisted the largest
number of households in Maricopa County, with 160 households receiving
assistance. Pima and Yavapai Counties follow with 121 and 49 households
assisted, respectively. Federal law requires the State to use all HERA monies by
September 2010. According to Department officials, they expect to commit all of
the monies by this date and to expend them by the end of 2010.1
This finding contains no recommendations.
1 Public Law 110-289, Sec. 2301(c)(1), (42 U.S.C. §5301 Note), requires the monies to be obligated within 18 months of
being received. The Department’s official Your Way Home program start date was March 2009.
Office of the Auditor General
page 29
State of Arizona
page 30
Department has generally sound system for
planning, awarding, and monitoring housing
program resources
The Arizona Department of Housing (Department) has a generally sound system for
overseeing the housing programs it administers. Oversight of these programs is
critical because the Department does not provide services directly but instead relies
on other entities to carry out program goals through monies the Department
provides. The Department carries out its oversight in three main ways: developing
plans that specify what the State is trying to accomplish in these programs, ensuring
that monies are awarded to projects that are consistent with these plans, and
monitoring the use of monies once awards are made. In the four programs auditors
reviewed—the Low-Income Housing Tax Credit program (tax credit program), the
Community Development Block Grant program (CDBG), and state- and federally
funded home purchase assistance programs—these oversight mechanisms were
well designed and effectively carried out. Auditors did identify one minor discrepancy
between department policy and actual practice in the community development block
grant program. To fix this discrepancy, the Department should revise its policy rather
than change the practice it has been using.
Effective monitoring system is critical to ensuring effective
use of resources and program compliance
Because the Department generally does not provide housing services directly, but
instead awards federal and state resources to others to carry out program goals, it
needs to have effective mechanisms in place to ensure that these other entities are
meeting these goals. The amount of money and other resources involved, as well as
the programs’ complexity, make it all the more important for the Department to have
an effective system. For example, between 2007 and 2009, in the four programs
Office of the Auditor General
page 31
FINDING 2
auditors examined, the Department has awarded or has plans to award $126.4
million in federal low-income housing tax credits, CDBG, and home purchase
assistance monies (see Table 4 for a summary of awarded amounts of monies for
these four programs in 2007 through 2009).
State of Arizona
page 32
Year
Tax Credit
Allocations
CDBG
Home Purchase
Assistance
Homes for
Arizonans
Your Way
Home Total
2007 $14.3 $12.0 $7.1 $33.4
2008 14.7 11.8 5.3 31.8
2009 20.4 12.1 2.7 $26.0 61.2
Total $49.4 $35.9 $15.1 $26.0 $126.4
1 The tax credit allocations are the total allocations that the Department reported to the U.S. Internal Revenue Service
(IRS) for calendar years 2007, 2008, and 2009.
2 The annual CDBG monies are the amounts that the U.S. Department of Housing and Urban Development (HUD)
awarded to the State CDBG program for federal fiscal years 2007, 2008, and 2009, beginning on October 1, 2006,
and ending on September 30, 2009. The Department awarded or will award these CDBG monies during state fiscal
years 2008, 2009, and 2010 beginning on July 1, 2007, and ending on June 30, 2010.
3 The Homes for Arizonans monies represent the total amount of loans that the Department approved during
calendar years 2007, 2008, and 2009.
4 The $26 million in Your Way Home monies represents the amount the Department designated for mortgage
assistance loans out of its total $38.3 million federal Neighborhood Stabilization Program allocation, and not actual
loans made in 2009. The program became available in May 2009.
Source: Auditor General staff analysis of the Department’s IRS 8610 reports for the Low-Income Housing Tax Credit
program for 2007 through 2009, HUD allocation announcements from www.hud.gov, and department data for
the Homes for Arizonans and Your Way Home programs.
Table 4: Monies for Tax Credit Allocations, CDBG, and Home Purchase
Assistance Programs
2007 through 2009 1-4
(In Millions)
(Unaudited)
An effective oversight system needs to accomplish three primary goals: (1)
developing priorities for how the monies will be used and communicating program
requirements to potential applicants, (2) making award decisions consistent with
those requirements, and (3) monitoring projects’ or individuals’ use of the monies
after awards have been made. Before awards are made, the Department’s typical
activities include annual planning, developing application materials, and evaluating
applications. Once an award is made, the Department’s typical oversight activities
involve in-house monitoring activities, also known as “desk reviews,” on-site
monitoring, and project closeout. Because much of these programs’ funding comes
from the federal government, many components of the Department’s oversight
system involve carrying out federal requirements. Complying with these requirements
is an important part of ensuring these funds’ continued flow.
Department meets federal tax credit program set-aside
and long-term compliance monitoring requirements
The Department employs good planning and monitoring practices to meet federal
mandates associated with administering the federal tax credit program. Specifically,
the Department consistently complies with IRS requirements for setting aside tax
credit allocations for nonprofit developers, considering state needs in allocating tax
credits, and performing long-term monitoring of rental housing developments.
Department follows federal mandate and considers other state
priorities and needs when making awards—The Department has
consistently met the federal mandate to set aside 10 percent of tax credits for
nonprofit developers. In addition, based on its 2007 allocation decisions, it also
appears to consider areas of greatest need when making allocation decisions.1
Specifically,
 Federal nonprofit set-aside mandate consistently met—Between calendar
years 2003 and 2009, according to reports submitted to the IRS, the
Department allocated all of the available tax credits, except for $739,352 in
2009 that it can carry over and award in 2010. During those same years, it met
and often exceeded the federally mandated 10 percent set-aside requirement
for nonprofit housing developers.
 Department considers state needs when allocating tax credits—As required
by the Internal Revenue Code, 26 U.S.C. §42(m)(1)(A)(i), the Department sets
forth Arizona’s state-wide priorities annually in a Qualified Allocation Plan (see
textbox, page 34). These priorities show the desired mix of projects in rural,
urban, and tribal land areas; projects intended to serve seniors or special
needs populations; and projects by nonprofit developers.
Program oversight is
important in ensuring
the appropriate use of
state and federal
monies.
1 Auditors selected 2007 for in-depth analysis because it was unaffected by tax code amendments that resulted from the
passage of the Housing and Economic Recovery Act of 2008 (HERA).
Office of the Auditor General
page 33
In 2007, the Department met all of the state-specific set-aside goals established in
that year’s Qualified Allocation Plan. As shown in Table 5 (see page 35), that year,
the Department’s initial award decisions resulted in nearly 30 percent of the tax
credits going to projects that would benefit rural communities, which exceeded the
Qualified Allocation Plan’s goal of awarding at least 10 percent to such projects. In
addition, as shown in Table 5, the Department’s initial award decisions resulted in
almost 24 percent of available tax credits directed to nonprofit developers.1
Department monitors compliance with tax credit program’s long-term
requirements—The Department also meets federal tax code
requirements to monitor tax credit program projects’ use for at least 30 years.
During this mandatory 30-year compliance time frame, federal regulations require
state monitoring agencies to review annual certification reports, conduct periodic
on-site inspections that involve verifying tenant income and checking property
maintenance, and notify both the property owners and the IRS of any
noncompliance issues (see textbox, page 36, for U.S. Department of Treasury
compliance monitoring requirements).
1 The tax credit allocation information presented in Table 5 consists of the initial amounts awarded to housing developers
through the competitive allocation process, which may differ from a developer’s final allocation amount. Some
approved projects may in later years receive a supplemental award, known as a “director’s discretionary” award.
State of Arizona
page 34
Qualified Allocation Plan (QAP)
A QAP must: (1) set forth selection criteria to be used to determine housing priorities that are
appropriate to local conditions, (2) give preferences to the allocation of the tax credits to
lower-income households and distressed areas, and (3) provide a procedure the agency will
follow for monitoring compliance. The selection criteria in the QAP must include:
Project location;
Housing needs, project, and sponsor characteristics;
Tenant populations for individuals with children and with special housing needs;
Public housing waiting lists; and
Projects intended for eventual tenant homeownership.
The QAP must also incorporate public comment and receive a public hearing.
Source: Auditor General staff analysis of 26 U.S.C. §42(m) and the Department’s 2009 QAP.
The Department maintains a strong control environment for documenting and
performing the compliance monitoring activities that the IRS requires. For example:
 Procedures, manuals, and checklists in place—The Department has standard
operating procedures for its staff and a compliance manual for property owners
that thoroughly describe the regulatory requirements and monitoring activities.
For example, both manuals describe annual certification procedures and on-site
monitoring requirements. The compliance team uses a set of monitoring
checklists for both its annual desk reviews and periodic on-site inspections.
 Training provided—The Department conducts periodic training for property
owners to help them understand the compliance requirements.
 Tracking schedules used—The Department also maintains an on-site
monitoring schedule to identify the properties that will be subject to a review. The
Office of the Auditor General
page 35
QAP State-Specific Set-Aside Goal Applications Awards
# % # Amount %
Nonprofit 1 20 percent of the State’s annual credit
authority is set aside for “nonprofit
projects.”
At least
20%
5 11.4 4 $3,087,439 23.7%
Urban $4.5 million is available for projects
located in Maricopa and Pima Counties.
Projects also seeking funding from the
U.S. Department of Agriculture’s rural
development program will be classified
as rural.
$4.5 million
available
8 18.2 3 2,661,489 20.4%
Rural
Not less than 10 percent of annual credit
authority is set aside for projects to be
located in rural areas.
At least
10%
21 47.7 6 3,878,365 29.8%
Senior $1 million for senior projects allocating
100 percent of its units to Seniors (age 62
and over and handicapped) with Support
Services.
$1 million 4 9.1 2 1,046,911 8.0%
Tribal A total of $1.5 million was allocated for
projects located on Tribal Lands.
$1.5 million 4 9.1 2 1,457,629 11.2%
Special Needs A total of $900,000 is available for
projects allocating 100 percent of their
units to Special Needs Populations.
$900,000
available
1 2.3 1 900,000 6.9%
General None specified. Applications that do not
fall within a specific set-aside category
are considered general applications.
1 2.3 0 $0 0
Total 44 100 18 $13,031,833 100
Table 5: 2007 Initial Tax Credit Awards Compared to 2007 QAP Set-Aside Goals
(Unaudited)
1 Except for the nonprofit set-aside category, all other set-aside categories are established at the Department’s discretion as part of the
annual QAP revision process. Federal tax code IRC §42(h) requires 10 percent of the State’s annual tax credit ceiling to be set aside for
nonprofit housing developers.
Source: Auditor General staff analysis of QAP 2007 set-aside goals, 2007 application information by set-aside, 2007 tax credit reservation
lists, and Internal Revenue Code 26 U.S.C.§42(h).
tracking schedule identifies the inspection date, the responsible staff, the dates
that the Department sends out finding notification letters, and if applicable, the
date it sends a noncompliance report to the IRS.
This control environment produces results. Auditors found that the Department
conducts thorough on-site inspections and takes appropriate action when it
discovers problems. For example, during one project’s on-site inspection in October
2009, compliance officers conducted physical inspections of 51 occupied and 11
vacant units out of a total 102 tax credit units and reviewed tenant files for the 51
occupied units. The number of units inspected met the federal standard that requires
the monitoring agencies to inspect each building in a property and exceeded the
State of Arizona
page 36
Rental Housing Tax Credit Program Compliance Monitoring Requirements
Federal regulations require tax credit program compliance monitoring programs
to include four key provisions:
1. Recordkeeping and record retention—A property owner must
maintain documentation specified in the federal regulation at least
6 years after federal tax return due dates.
2. Annual certifications and reviews—A property owner must submit
an annual report to the state agency certifying the building’s
continued use as an affordable rental property, and the State
agency must review the reports.
3. On-site inspections—Two years after a building has been placed
into service, and every 3 years afterward, state agencies should
conduct on-site inspections that involve:
Income verifications performed on a random sample of 20
percent of the building’s designated low-income units.
Physical inspections of the units selected for the file review.
The inspections must follow the Uniform Physical Condition
Standards (UPCS) protocol.
4. Notification of noncompliance—Give prompt written notice to a
property owner of any noncompliance issues found in annual
reports and on-site inspection. State agencies are required to
submit notices of noncompliance to the Internal Revenue Service
(IRS) 45 days after the expiration of a 90-day correction period,
even if the noncompliance was corrected during the correction
period. If property owners resolve a noncompliance issue within 3
years, the IRS requires the State to submit a “back-in-compliance”
report.
Source: Auditor General staff analysis of 26 C.F.R. §1.42.5 and The IRS Guide for Completing Form 8823
Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition (October
2009).
federal minimum standard of inspecting and reviewing records for a minimum of 20
percent of the low-income units. The Department found income verification issues in
more than half of the sample, such as files without information about child support
income or files showing incorrect calculations for the amount of rent that tenants
should be paying. Similarly, the Department identified physical inspection issues in
nearly half of the units reviewed, such as dysfunctional fire alarms, damaged locks,
and damaged appliances.1
Finally, the Department reports properties’ compliance to the IRS, which decides
whether to take action against noncompliant properties. If, within 3 years, a property
owner completely addresses the noncompliance issues, federal regulations require
the Department to submit a “back in compliance” report. For noncompliant
properties, the IRS can withdraw or reduce the amount of tax credits allowed.
Department records show that between December 2006 and November 2009, the
Department reported 27 noncompliant properties to the IRS—meaning properties
that had not corrected their noncompliance during the 90-day correction period—of
which 18 were reported as “back in compliance.” A department compliance official
reported that during her tenure, she was aware of only two rental properties that have
been the subject of an IRS action, such as an audit or the revocation of tax credits.
Department provides appropriate oversight for CDBG
program
The Department has effective mechanisms in place to administer the CDBG program
and monitor projects, and its practices have improved over time. The Department
uses appropriate tools and practices to review CDBG applications, assess project
eligibility, and conduct in-house and on-site CDBG monitoring. The Department
meets its in-house monitoring duties and has improved such practices over time.
Auditors identified one issue—the number of on-site inspections to be conducted—
in which the Department needs to align its policy with actual practice.
Department uses appropriate tools and practices for planning,
allocation, and eligibility determination—The Department meets the
U.S. Department of Housing and Urban Development’s (HUD) annual planning
requirements, and it assesses funding applications to ensure they meet CDBG
eligibility and national objective requirements. For example:
Department inspections
of one tax credit
property found
problems in
approximately half of the
files and units.
1 Followup on these findings was under way as this audit was being completed. The Department communicated its
findings to the property owners on November 5, 2009. The owners are required to respond to the findings within 45 days
of receiving the Department’s notification letter. The Treasury regulations allow for a total 90-day correction period to
respond to any findings, and the IRS requires the Department to submit a report detailing any outstanding
noncompliance issues no later than 45 days after the end of the correction period. As of March 3, 2010, the Department
anticipates that the property owners will have corrected the issues identified during the site visit, and also anticipates that
the Department will submit a report to the IRS that will comment on the property’s status.
Office of the Auditor General
page 37
 Five-year planning completed with required public input—HUD requires the
State to develop a 5-year plan that sets forth state priorities for CDBG monies
and to submit an updated action plan annually during this 5-year time frame
to identify annual objectives and expected accomplishments the State hopes
to achieve. HUD requires that the Department seek public input into its 5-year
plans. The State’s 2005-2009 Consolidated Plan describes the public
participation efforts that the Department undertook prior to completing that 5-
year plan. The State intends to submit its 5-year planning document for the
period 2010 through 2014 to HUD on May 15, 2010. In September 2009,
auditors observed the public meeting the Department scheduled to obtain
input for that 5-year planning document.
 CDBG eligibility aligned with national objectives—Although federal rules allow
CDBG monies to be used for more than 25 kinds of activities, all such activities
must still meet a national objective of (1) addressing the needs of low- to-moderate
income families, (2) mitigating slum and blight conditions, or (3)
addressing an urgent community need. The Department’s application review
procedures ensure that projects meet CDBG eligibility requirements and
national objectives, as well as the State’s priorities as set forth in the 5-year
plan, prior to awarding CDBG funds. During the application review process, a
project specialist and then the management team reviews the CDBG project
applications to assess (1) the projects’ eligibility under both federal
requirements and state priorities, and (2) the communities’ readiness to begin
a project and the communities’ need for technical assistance (see Introduction
and Background, page 4, for the CDBG program’s description).
The guidance used in making these determinations—as well as in helping
applicants prepare—is strong. The Department’s CDBG staff rely on
comprehensive guidance documents, including an administrative handbook and
standard operating procedures. Further, the Department produces a CDBG
application handbook to assist the communities that apply for CDBG monies. Both
the internal and external guidance documents provide thorough information about
CDBG application requirements, contract development, in-house review, and on-site
monitoring requirements.
Department uses appropriate tools to meet required in-house review
duties—After the Department verifies eligibility, approves a project contract, and
awards the funding, the Department monitors the project’s progress and
expenditures to ensure compliance with contract provisions and HUD
requirements. The Department has appropriate tools to perform these duties. For
example, the Department has monitoring checklists that cover a variety of contract
provisions and federal requirements, such as procurement, labor reviews,
environmental reviews, and project expenditures, as well as on-site monitoring
checklists designed to check similar activities during a site visit. In addition, the
Department updates its procedures as needed.
State of Arizona
page 38
The Department’s in-house monitoring activities appear to be effective and
performed in accordance with department policies. The Department monitors
projects for (1) compliance with administrative requirements such as procurement,
labor standards, and environmental reviews; (2) project progress; and (3)
appropriateness of expenditures. Specifically, for the five projects approved
between fiscal years 2004 and 2007, auditors examined the following in depth:1
 The Department ensured that the required procurement, labor standards, and
environmental reviews were completed; and provided technical assistance to
community officials during each project.
 The Department ensured that projects were making satisfactory progress and
payment requests were properly supported and authorized prior to releasing
CDBG monies. In one of the five projects, the Department issued a warning
letter that could have resulted in the withdrawal of CDBG funds. Specifically,
while monitoring a town water system improvement project, the Department
sent town officials a Failure to Progress letter to inform them that the project
was not proceeding in a timely fashion. Had town officials not addressed the
timeliness issues, the Department reported that it no longer would have
provided funding for the project, and would have required the community to
repay any monies it had already received.
Finally, the Department’s in-house review activities appear to have improved over
time. When looking at the 2004 through 2007 project file folders sequentially, the
files associated with each project show progressive improvement, such as fewer
clerical errors, neater and more consistent organization, and an easier ability to
track project history.
Department should better align policy with on-site monitoring
practice—The Department’s actual on-site monitoring practices do not
consistently align with its policy. The Department’s policies require its project
specialists to conduct two on-site monitoring visits to each CDBG project.
However, in four of the five projects auditors reviewed, specialists conducted only
one on-site visit. CDBG specialists explained that many project-monitoring
activities can be performed in-house rather than through an on-site monitoring
visit. They said that some “problem projects” require and receive more frequent
on-site monitoring. However, in other cases, documentation received through the
mail, for example, can adequately verify compliance, progress, and expenditures.
This appears to be a situation in which the policy should be revised to reflect actual
practice rather than changing the practice to conform with written policy. In the four
projects auditors reviewed that had only one site visit, a variety of administrative
controls were in place in addition to the site visit to help ensure appropriate project
oversight. For example, for all four projects, the file documentation supported that
the Department had assessed the communities’ ability to complete the projects. In
CDBG projects are
monitored in several
areas to ensure
appropriate use of
federal grant monies.
1 Auditors reviewed case files for five closed-out CDBG projects from program years 2004 through 2007. Auditors selected
four projects from the CDBG formula allocation category awarded to Bullhead City, Eloy, Prescott Valley, and Willcox, and
one project from the competitively awarded category awarded to the Town of Parker.
Office of the Auditor General
page 39
addition, the files included checklists that provided evidence of monitoring
required labor and environmental reviews, and periodic quarterly progress reports.
These administrative controls were sufficient to ensure the project met department
requirements even though department staff only conducted one on-site visit. The
Department should revise its standard operating procedures and its administration
handbook to reflect the on-site monitoring practice it is currently following.
Department’s various monitoring types provide
appropriate oversight for home purchase assistance
programs
The Department relies on several types of monitoring, including monitoring
conducted through a Web application, to oversee the day-to-day activities of the
lenders and nonprofit counseling agencies that perform key functions in home
purchase assistance programs. While the Web application is new with the Your Way
Home program, the Department continues to use other more traditional monitoring
tools.1 Finally, the Department also monitors the borrower’s compliance with loan
terms over the long-term, including any payoffs, if required.
Department relies on a Web site to monitor some third-party
contractor decisions and lending activities—Starting in May 2009, the
Department began to use a Web-based application as its primary mechanism for
monitoring the decisions and activities of the third-party lenders and counseling
agencies involved in the federally funded Your Way Home program. The
Department uses the Web site to oversee two main aspects of the program:
 Transfer of applicant information and program documents—The
Department’s loan staff use the Web site to receive application information
from the primary lender in an electronic format. The information is reviewed
according to program guidelines and compared to what the housing
counseling agencies send in to the Department. According to department
staff, they check the borrower’s income, as reported to them by the primary
lender and housing counseling agencies, to make sure the borrower falls
within the required income eligibility limits.2 Additionally, the Department posts
the loan program documents it generates to the Web site for the housing
counseling agencies to retrieve.
Administrative controls
ensure projects meet
department
requirements.
1 The Department suspended the Homes for Arizonans program in July 2009 because of the launch of the federally funded
Your Way Home loan program and uncertainty about the State Housing Trust Fund’s status as a continued source of
funding.
2 The Department relies on the contracted housing counseling agencies to check physical documents to verify borrowers’
income. For example, the counseling agencies must review the borrower’s pay stubs, income-tax statements, and bank
statements, and verify the borrower’s employment. Because the counseling agencies’ activities take place after a primary
lender has pre-qualified the borrower for a first mortgage, the borrower’s documents and employment are verified twice.
State of Arizona
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 Tracking borrower and loan status—The Department uses the Web site to
monitor how many households its preferred lenders have pre-qualified for a
first mortgage and referred to nonprofit housing counseling agencies.
Similarly, it also uses the Web site to track how many households its
contracted housing counseling agencies are pre-qualifying and certifying for
a second mortgage to begin the home-buying process. To be certified, an
applicant must complete a mandatory home-buyer education class.
Department also performs more traditional in-house monitoring of
contracted nonprofit housing counseling agencies—As it did in the
suspended state-funded Homes for Arizonans program, the Department also
continues to use more traditional tools to oversee the third-party, nonprofit housing
counseling agencies involved in Your Way Home. In both programs, the
Department has contracted only with nonprofit agencies that HUD has certified as
meeting requirements associated with the federal Housing Counseling Assistance
Program. In addition to requiring such HUD certification, contracts for both loan
programs show that the Department requires the agencies to provide homebuyer
education, marketing, borrower qualification, and borrower assistance, such as a
property inspection.
The Department’s review of the contracted agencies mainly involves reviewing two
types of documents:
 Monthly progress reports—In the Homes for Arizonans program, the
counseling agencies must submit monthly progress reports that provide
information on such things as the number of borrowers served and the total
loans processed. The agencies would receive their monthly administrative fee
only after the Department had received the required monthly progress report.
A review of the Homes for Arizonans contract files for the three counseling
agencies for the 2-year contract period spanning July 2006 through June 2008
showed that all three agencies submitted reports for all 24 months included in
the 2-year time frame.
 Loan closeout documentation—In contrast to the Homes for Arizonans
program, the Department reports that it has opted not to require its contracted
agencies to submit monthly progress reports in the Your Way Home program.
Although the Department included this requirement in its contract and
administrative manual, a key department official explained that the
Department opted not to require the reports because it receives sufficient loan
progress information through the Web site and final loan closeout documents.
In lieu of monthly progress reports, the Department instead requires the Your
Way Home housing counseling agencies to submit a loan closeout packet
that includes the executed promissory note and deed of trust. The packet also
Department contracts
with HUD-certified
nonprofit organizations.
Office of the Auditor General
page 41
includes documentation to support reimbursement for activities the
counseling agencies performed for the borrower, such as a property
inspection. The Department relies on a checklist to review the information the
counseling agencies submit in the closeout packet, and a review of eight Your
Way Home loan closeout packets’ documents showed evidence that
department staff reviewed all of the information they required the agencies to
submit to support their reimbursement.
Department monitors loan payoffs, as required—Finally, in the state-funded
Homes for Arizonans program, the Department has taken appropriate
action to ensure that borrowers meet the required payoff terms when events take
place that would change the homeowner’s status as the homeowner.1 Although
the loan program does not have a term, it nonetheless places a permanent lien on
the property that must be repaid if the home is sold. The loan must also be repaid
in the event of a foreclosure. The Department reported that it had received $1.78
million in Homes for Arizonans payoffs during the period January 1, 2002 through
December 31, 2009.
Recommendation:
2.1. The Department should align on-site monitoring policies with on-site monitoring
practices by revising its standard operating procedures and its CDBG
administration handbook.
1 The federally funded Your Way Home program was too new at the time of the audit to assess whether the Department
took appropriate steps to meet required payoff terms.
State of Arizona
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Office of the Auditor General
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SUNSET FACTORS
In accordance with Arizona Revised Statutes (A.R.S.) §41-2954, the Legislature
should consider the following 12 factors in determining whether the Arizona
Department of Housing (Department) should be continued or terminated.
1. The objective and purpose in establishing the Department.
The Department was established in 2002 to address the affordable housing
issues confronting the State and to provide greater coordination and innovation
of housing-related services at the state level.1 Prior to that time, the Department
of Commerce performed the Department’s functions.
To address affordable housing issues, the Department acts as a pass-through
agency for state and federal monies and oversees compliance for several
housing programs. The state and federal monies are used for projects that
range from assisting individuals in becoming homeowners or assisting
individuals facing mortgage, rental, or emergency housing problems to
developing new affordable housing for seniors or others with special needs.
Projects can also focus on community revitalization and include projects such
as building food banks or developing or improving community infrastructure. In
addition to administering state and federal housing and community programs,
the Department provides technical assistance to communities, and serves on
councils and commissions that address affordable housing needs.
2. The effectiveness with which the Department has met its objective and purpose
and the efficiency with which it has operated.
The Department has generally met its objective and purpose. This audit
identified a need for a minor policy change in one program to bring policy into
alignment with its oversight practices, which are sound.
The Department has met its objective of addressing the affordable housing
issues confronting the State by overseeing a variety of housing programs
including:
 Low-Income Housing Tax Credit program (tax credit program)—This U.S.
Internal Revenue Service program, which the Department administers in
1 The same 2001 bill that established the Department, Laws 2001, Ch. 22, §14, also established the Arizona Housing
Finance Authority (Authority) in §12. The Authority was established to issue bonds or certificates, or provide financial
assistance for housing purposes and to temporarily acquire title to real property, among other duties. Although the
Authority is staffed by the Department, it is a separate entity from the Department and is not subject to sunset review.
State of Arizona
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Arizona, awards federal tax credits to affordable housing developers. The
credits are sold to investors, and the proceeds are used to finance the
construction or acquisition and rehabilitation of rental units for low- to
moderate-income households. This audit found that the tax credit program
has provided additional affordable housing opportunities for low-income
individuals and families, the elderly, and special needs populations (see
Finding 1, pages 13 through 30). In calendar year 2003, the Department’s
first full year as a stand-alone agency, it awarded $9.4 million in tax credits
to projects to develop or rehabilitate 1,190 affordable housing units, and
since 2003, it has awarded nearly $82 million in annual tax credits and
developed approximately 6,800 low-income housing units. For example,
one 2003 project developed an 89-unit apartment complex in Sierra Vista
serving predominantly families earning 60 percent or less of the area’s
median income.
 Community Development Block Grant program (CDBG)—From fiscal year
2003 through 2009, the Department reported that it had distributed over
$86 million in U.S. Department of Housing and Urban Development (HUD)
block grant monies to support over 430 projects throughout the State.
These grant monies have been used for a wide variety of projects to meet
the national program’s objectives: benefiting low- and moderate-income
people, addressing slum or blight conditions, or addressing urgent
community development needs. According to the Department, most CDBG
projects tend to be directed toward benefiting low- and moderate-income
people. See Finding 1, pages 13 to 30, for additional information on this
program’s impact.
 Home ownership assistance programs—The Department’s home
ownership assistance programs include the Homes for Arizonans program,
which was available from 1998 until July 1, 2009, and the Your Way Home
program, which was implemented in fiscal year 2009 using federal stimulus
monies. Homes for Arizonans offered first-time home buyers assistance
through no-interest loans that only needed to be repaid upon sale of the
property or violation of program requirements. Since its establishment in
2002, the program has helped over 2,900 households purchase homes.
The Your Way Home program helps qualified homebuyers purchase
eligible foreclosed homes and as of March 12, 2010, had distributed nearly
$13.7 million of the available $26 million to individual home buyers.
 Special needs and homeless programs—Homelessness and other special
needs are addressed through four programs that provide monies to local
governments, nonprofit organizations, and public housing authorities.
These programs provide rental assistance and other services to people
with HIV/AIDS, homeless people with disabilities, and people making a
transition from homelessness to independent living. First, the Housing
Office of the Auditor General
page 45
Opportunities for Persons with AIDS (HOPWA) program provides funding to
nonprofit organizations to assist individuals with HlV/AIDS. Second, a
continuum of care process provides Shelter Plus Care and Supportive
Housing Program grants to pay for housing and services such as
healthcare, employment assistance, and child care. Third, Eviction
Prevention/Emergency Housing grants, which according to the Department
will be discontinued in June 2010, provide rental security deposits, utility
payments, landlord-tenant mediation, household management assistance,
or other services that helped to deter homelessness. Fourth, the
Department is administering federal stimulus monies for the Homeless
Prevention Rapid Re-housing Program, which assists low-income families
in retaining or securing housing.
The audit found that the Department could improve CDBG program oversight
by better aligning its policies with its on-site monitoring practices.
3. The extent to which the Department has operated within the public interest.
The Department operates within the public interest by administering several
programs that improve living conditions, reduce blight, and assist communities
throughout Arizona. For example, programs in the rental development area
assist low- and middle-income residents by making safe, affordable housing
available through development projects. The CDBG program improves
communities by, for example, establishing or upgrading water and sewage
systems and establishing or improving other facilities such as libraries, parks,
and community centers.
According to the Department, it also operates within the public interest by
stimulating the economy through adding jobs and tax income to the State. For
example, the tax credit program provides developers with a way to finance low-income
rental developments, which creates jobs in areas such as construction,
inspection, and building and equipment supplies. The Department also acts in
the public interest by conducting oversight of these developments to ensure
they are in compliance with federal regulations and restrictions.
In the home purchase area, the Department operates within the public interest
by administering the federal stimulus monies earmarked for the foreclosure
crisis by providing Arizonans facing mortgage foreclosure access to counseling
services. In areas hardest hit by foreclosure, the Department’s Your Way Home
program, funded by the federal Neighborhood Stabilization Program, helps
homebuyers buy foreclosed properties, and as of March 12, 2010, the program
had assisted 462 families purchase homes. Department programs also address
the housing crisis through rental subsidies and ongoing support services that
assist the formerly homeless.
State of Arizona
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The Department also serves as a Public Housing Authority, which oversees two
HUD Section 8 programs.1 Specifically:
 The Department provides administrative oversight to more than 7,900
individual rental units in approximately 110 HUD-subsidized rental
properties throughout Arizona. The Department must assure that the
housing is maintained as safe, decent, affordable housing. In addition, the
Department reports that it conducts management and occupancy reviews
on each property and responds to tenant complaints. Finally, the
Department serves as an information source for landlords and Section 8
voucher recipients.
 The Department administers the Section 8 Housing Choice Voucher
Program for Yavapai County. This program provides rental subsidies for
very low-income households so that participants’ rent and utilities expense
is limited to 30 percent of their adjusted gross income. Participants receive
vouchers that may be used at any qualified rental property in Yavapai
County. The Department processes the payments, provides information to
landlords and recipients, maintains waiting lists, and annually both
recertifies participants and inspects housing units.
4. The extent to which rules adopted by the Department are consistent with the
legislative mandate.
The Department has authority to promulgate rules, but it is not required to do so.
A.R.S. §§35-728(A)(1) and 41-3953(C)(12) give the Department rule-making
authority, but the Department has not promulgated any rules.
5. The extent to which the Department has encouraged input from the public
before adopting its rules and the extent to which it has informed the public as to
its actions and their expected impact on the public.
Although the Department has not promulgated any rules, it obtains public input
and informs the public of its actions in several ways, including:
 Web site—The Department maintains a Web site at www.azhousing.gov
that contains information intended to inform the public of its actions,
including information about upcoming trainings and free educational
sessions. In addition, it posts information on notices and deadlines, such
as notices of funding availability, public comment periods, and deadlines
for applications for various types of housing funding.
 Qualified Allocation Plan (QAP) public hearings—Annually, the Department
develops a Qualified Allocation Plan for the tax credit program that sets
1 The U.S. Housing Act of 1937, Section 8, authorizes rental voucher and existing housing programs intended to help low-income
households choose and rent safe, decent, and affordable housing. Regulations are found in 24 C.F.R. Part 982,
and the programs are administered by HUD’s Office of Public and Indian Housing.
Office of